Ricardian equivalence is an economic theory proposing that consumers are forward-looking and will adjust their savings behavior based on government fiscal policy, particularly concerning budget deficits. This concept suggests that when a government increases debt to fund spending, individuals anticipate higher future taxes and, as a result, save more to offset this expected financial burden. Thus, the overall effect of government borrowing on aggregate demand may be neutralized as individuals adjust their consumption patterns in response to perceived fiscal responsibility.
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