1. Which of the following is the best characterization of the theory of Ricardia
ID: 1181521 • Letter: 1
Question
1.
Which of the following is the best characterization of the theory of Ricardian equivalence? Trade between two nations is mutually beneficial if each nation specializes in goods and services for which they have a comparative advantage. Fiscal policy and monetary policy both have the potential to influence aggregate demand. People change their consumption and saving decisions in response to budget deficits or surpluses. Fiscal policy can achieve equivalent results with changes in either taxation or government spending practices. Which of the following is the best example of the behavior predicted by the theory of Ricardian equivalence? An individual that increases saving in response to a tax cut in anticipation of future tax increases. A politician who suggests both tax cuts and increased government spending as expansionary fiscal policy. An individual that increases consumption in response to a tax cut because they are able to keep a greater percentage of their income.Explanation / Answer
People change thier consumption and savings decisions in response to budget deficits or surpluses.
An individual that increase savings in response to a tax cut in anticipation of future tax increases.
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