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Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of 50, a trade deficit of 20, private savings of 130, and an investment of 100. If the budget deficit rises to 70, how are the other terms in the national saving and investment identity affected?

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jepessoa

Answer:

According to Ricardian equivalence, any change in the government budget is offset by a change in private savings. Therefore if the government's deficit increases by 20, private savings will also increase by 20. The remaining terms of the economy are not affected, trade deficit and investment remain the same.

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