Which of the following correctly explain Ricardian equivalence? Government spend

Question

Which of the following correctly explain Ricardian equivalence?

Government spending does not crowd out private investment.

Government spending that is financed by borrowing has a smaller effect on the economy than government spending financed by raising taxes.

The government should balance its budget by equating revenue and expenditure in every fiscal year.

Government borrowing can function like increased current taxes, reducing current household and business expenditures.

Consumers do not base current spending on future expected tax liabilities.

Suppose an economy is in equilibrium. Also suppose that consumer expectations change as the threat of war increases the likelihood of an increase in taxes. This would result in:

Select one:

no change in equilibrium income.

an increase in equilibrium income.

a change in the slope of the aggregate supply curve.

a decrease in equilibrium income.

a downward shift of the aggregate supply curve.

Explanation / Answer

Ans) the correct option is Government borrowing can function like increased current taxes, reducing current household and business expenditures. Ricardian equivalence states that people are forward looking and their consumption decisions are formed by internalizins government budget constraint

Ans) the correct option is a decrease in equilibrium income. Because of the taxes, less output will be produced so the equilibrium income will decrease

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