Is ricardian equivalence a reasonable description of reality

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Assume that we have Ricardian equivalence. This implies that consumption depends on expected life- time incomes and that individuals understand the government's intertemporal budget restriction.

a) How will consumption be affected by a tax reduction today if future government consumption is assumed not to be affected? Motivate your answer using the intertemporal budget restrictions that households and the government are facing!

b) Is Ricardian equivalence a reasonable description of reality?

Reference no: EM13239580

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