Author Question: What does Ricardian equivalence imply about the relative size of the expenditure and tax ... (Read 59 times)

mrsjacobs44 · **on:** Jun 30, 2018

What does Ricardian equivalence imply about the relative size of the expenditure and tax multipliers?

What will be an ideal response?

Question 2

Menu costs suggest that sticky prices are ____ for firms but _____ for the economy as a whole.

a. optimal; suboptimal
b. bad; good
c. natural; unnatural
d. suboptimal; optimal.
e. suboptimal; suboptimal

lkoler · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

If Ricardian equivalence holds, the tax multiplier is zero. The expenditure multiplier is zero, as well, since the decrease in government saving is matched by an increase in private saving. If, however, the increase in government spending is believed to contribute to future output, the expenditure multiplier may be greater than zero, and some private investment would be crowded out.

Answer to Question 2

A