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Unformatted text preview: multiplier effect. Net national savings decreases, the real interest rate increases, and investment goes down and in the long-run the effect is reflected in a lower stock of capital. In the Ricardian point of view a reduction in taxes does not increase the lifetime wealth of forward looking consumers who anticipate a later increase in taxes to repay the budget deficit. In this view consumers save the tax cut and use it to pay for the increased taxes in the future. Net national savings stays and the real interest rate also stays the same. RULES VERSUS DISCRETION IN MONETARY POLICY Optimal choices with commitment for the future are time inconsistent. Changing the policies as the future arrives (discretionary policies) only brings bad results for the economy. That is the reason why policies with rules are better than discretion. The way to achieve this is through Inflation Targeting and Central Bank Independence....
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