What were the principal causes of the U.S. government budget deficits of the 1980s? How did these budget deficits lead to the twin deficits? According to the Ricardian equivalence proposition, should twin deficits arise as a result of tax cuts?

What will be an ideal response?

The principal causes of the U.S. federal government budget deficits of the 1980s were a reduction in government revenue (in part because of the Economic Recovery Tax Act of 1981 ) and increased military spending. The twin deficits arose because the increased government budget deficit reduced national saving, leading to a current account deficit. According to the Ricardian equivalence proposition, a government budget deficit created by a tax cut will have no real economic effects because it will not affect saving. According to this theory the government budget deficit and the trade deficit are independent events.