Ricardian Equivalence Theorem

The Government issues more debt today to finance an increase in the Government Deficit, and Private Saving increases by an equal amount, since the representative Consumer saves more to pay the higher taxes in the future.

          The Ricardian Equivalence Theorem. For example, holding the path of Government purchases constant, if the representative consumer receives a tax cut today, he/she knows that the government will have to make this up with higher future taxes.