Uploaded August 2026 | Updated September 2026, 2 weeks ago
When a government attempts to stimulate aggregate demand (AD) during a downturn, it typically relies on expansionary fiscal policy - either lowering taxes or increasing government spending. According to traditional Keynesian transmission mechanisms, this injection, funded by borrowing, creates a multiplier effect that expands real GDP. However, Ricardian Equivalence, named after 19th-century classical economist David Ricardo and modernised by Robert Barro, challenges this entirely. It posits a scenario where the fiscal multiplier is exactly zero.
When a government attempts to stimulate aggregate demand (AD) during a downturn, it typically relies on expansionary fiscal policy - either lowering taxes or increasing government spending. According to traditional Keynesian transmission mechanisms, this injection, funded by borrowing, creates a multiplier effect that expands real GDP. However, Ricardian Equivalence, named after 19th-century classical economist David Ricardo and modernised by Robert Barro, challenges this entirely. It posits a scenario where the fiscal multiplier is exactly zero.
