Question

Ricardian equivalence means that:

O changes in private savings offset any changes in the government deficit.
O changes in exports offset any changes in the government deficit.
O changes in imports offset any changes in the government deficit.
O changes in investment offset any changes in the government deficit.

Answer 1

changes in private savings offset any changes in the government deficit

Step-by-step explanation:

Ricardian equivalence means that private saving changes offset any changes in the government budget. Therefore, if the deficit increases by 30, private saving also increases by 30 but the trade deficit and the budget deficit will not change.

In case of the Ricardian equivalence, economic agents are assumed to be perfectly rational. According to them, higher taxes are required to repay the debt in case of an increase in deficit-financed government spending.