if the Ricardian equivalence holds,explain how a change in taxes will affect the equilibrium position in the the IS-LM model
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This is the idea that consumers anticipate the future so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged.
Similarly, higher government spending, financed by borrowing, will imply lower spending in the future.
If this theory is true, it would mean a tax cut financed by higher borrowing would have no impact on increasing aggregate demand because consumers would save the tax cut to pay the future tax increases.
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