This topic contains a solution. Click here to go to the answer

Author Question: Explain the macroeconomic effects of a tax cut according to the Ricardian Equivalence proposition. ... (Read 96 times)

ETearle

  • Hero Member
  • *****
  • Posts: 580
Explain the macroeconomic effects of a tax cut according to the Ricardian Equivalence proposition. Include in your answer the IS-LM graph that shows the effects of this tax cut.
 
  What will be an ideal response?

Question 2

The effect of changes in economic activity on the budget deficit is called
 
  A) fine tuning.
  B) debt monetization.
  C) the structural deficit.
  D) tax smoothing.
  E) none of the above



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

bigcheese9

  • Sr. Member
  • ****
  • Posts: 333
Answer to Question 1

The Ricardian Equivalence proposition describes the effects of, for example, tax cuts. A tax cut will have no effect on the demand for goods according to the Ricardian Equivalence proposition. A tax cut in the current period will cause an increase in the budget deficit. At some point in the future, say one year, taxes will have to increase to pay off this debt. Individuals will realize this. Once they do, they will realize that the current period tax cut is equivalent to a future period tax increase of the same present value. Hence, they realize that their wealth does not increase as a result of this tax cut. So, they do not increase consumption. In fact, they simply save all of the tax cut. In terms of the IS-LM model, the tax cut does not increase consumption or demand. So, the IS curve does not shift and there is no change in output or the interest rate.

Answer to Question 2

E




ETearle

  • Member
  • Posts: 580
Reply 2 on: Jun 30, 2018
Wow, this really help


strudel15

  • Member
  • Posts: 324
Reply 3 on: Yesterday
Thanks for the timely response, appreciate it

 

Did you know?

IgA antibodies protect body surfaces exposed to outside foreign substances. IgG antibodies are found in all body fluids. IgM antibodies are the first type of antibody made in response to an infection. IgE antibody levels are often high in people with allergies. IgD antibodies are found in tissues lining the abdomen and chest.

Did you know?

The U.S. Preventive Services Task Force recommends that all women age 65 years of age or older should be screened with bone densitometry.

Did you know?

If all the neurons in the human body were lined up, they would stretch more than 600 miles.

Did you know?

More than 30% of American adults, and about 12% of children utilize health care approaches that were developed outside of conventional medicine.

Did you know?

Over time, chronic hepatitis B virus and hepatitis C virus infections can progress to advanced liver disease, liver failure, and hepatocellular carcinoma. Unlike other forms, more than 80% of hepatitis C infections become chronic and lead to liver disease. When combined with hepatitis B, hepatitis C now accounts for 75% percent of all cases of liver disease around the world. Liver failure caused by hepatitis C is now leading cause of liver transplants in the United States.

For a complete list of videos, visit our video library