Question

Illustrate the concept of Ricardian equivalence using the demand and supply of financial capital graph.

Short answer

Ricardian Equivalence :

Ricardian Equivalence is a term used to describe the equivalence

Governments can finance their spending by printing new money, levying taxes, or issuing bonds. Bonds are advances, thus they should be repaid eventually, most likely by raising government rates. As a result, the choice is 'tax now or tax later.'

Step-by-step solution

Definition

Ricardian Equivalence :

Ricardian Equivalence is a term used to describe the equivalence

Governments can finance their spending by printing new money, levying taxes, or issuing bonds. Bonds are advances, thus they should be repaid eventually, most likely by raising government rates. As a result, the choice is 'tax now or tax later.'

Explanation

The graph depicts how increasing capital demand from government borrowing is satisfied by an equal rise in private savings or capital supply.