Ricardo-Barro Effect


DEFINITION of 'Ricardo-Barro Effect'

A macroeconomic concept that postulates that when a government runs a budget deficit, households and firms will respond by increasing their level of savings. This behavior allows the aggregate savings of an economy to remain unchanged.

BREAKING DOWN 'Ricardo-Barro Effect'

Under the Ricardo-Barro theory, the government is likely to increase taxes in the future in order to repay the money being borrowed to finance a current budget deficit. As a result, households and firms will increase their current level of savings in order to afford to pay higher taxes in the future.

  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Federal Debt

    The total amount of money that the United States federal government ...
  3. Government Purchases

    Expenditures made in the private sector by all levels of government, ...
  4. Fiscal Deficit

    When a government's total expenditures exceed the revenue that ...
  5. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  6. Economics

    A social science that studies how individuals, governments, firms ...
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