Explain the Ricardian equivalence theorem
What will be an ideal response?
The Ricardian equivalence theorem is the proposition that an increase in the government budget deficit has no effect on aggregate demand. When government spending increases without taxes, people expect future taxes to increase and so increase their saving to be ready to pay the higher future taxes. The reduction in consumption spending offsets the higher government spending, so that aggregate demand does not change.
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Sometimes you will hear economists argue that the infant industry argument against free trade is a weak one because these industries never seem to "grow up." What is meant by this argument?
What will be an ideal response?
Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following could explain the failure of a poor country to catch up?
a. The poor country has a health epidemic such as the Zika virus b. The poor country imposes heavy tariffs to protect infant industries c. The poor country has many corrupt officials d. All of the above
LRAS2 shows a(n) ______.
a. increase in real GDP supplied
b. decrease in real GDP supplied
c. increase in price level
d. decrease in price level
Which of the following is one of the simplifying assumptions made in constructing a production possibilities curve?
A. The state of technology is constantly changing B. A wide variety of products are produced C. Resources are fully employed and are used in least-cost methods of production D. Quantities of available resources in the economy vary from one point to another