Temporary increase of the same amount

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A permanent increase in government purchases has a larger effect on national savings than a temporary increase of the same amount". Use the saving-investment diagram to assess the validity of this statement.

Hints: (1) assume that the Ricardian Equivalence holds; (2) a permanent increase in government purchases implies larger increases in current and future taxes). Remember: consumers always like to smooth consumption.

Reference no: EM131870770

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