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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

What is the theory of Ricardian equivalence?

To determine

The theory of Ricardian equivalence needs to be explained.

Explanation

In Richardian equivalence theory, people tries to save the money today in order to pay the taxes in the upcoming future. A tax cut today does not leads to increase in the aggregate demand in the short run.

1) Life cycle hypothesis

2) Richardian expectations theory

Consumers are well enough to balance the spending of present and future. They desire to smooth their consumption over the course of their life. Some consumers in the market are not rational and they do not focus on the rise and fall of taxes...

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