The graph below depicts the patterns of budget deficits and rates of private sav

Question

The graph below depicts the patterns of budget deficits and rates of private savings in the small island republic of Lani Lani. Please use the information presented in the graph to answer the questions below. The graph is for reference purposes only. What flaw in the theory of Ricardian equivaluence does the information in this graph highlight? Private households and firms do not always make their savings decisions in response to the government budgetary situation. The government is never able to attain a budget surplus. Private households and firms fo not have information about the government budget. Over time, governments will increase their budget deficits, not decrease them.

Explanation / Answer

Private households and firms do not always make their savings decisions in response to the government budgetary situation.

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