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.

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  2. Federal Debt

    The total amount of money that the United States federal government ...
  3. Fiscal Deficit

    When a government's total expenditures exceed the revenue that ...
  4. Government Purchases

    Expenditures made in the private sector by all levels of government, ...
  5. Economics

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

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