Explain the concept of Ricardian equivalence
What will be an ideal response?
This an economic theory of taxes and government deficits. It argues that when the government cuts taxes and raises its deficit, consumers anticipate higher taxes later to pay off the eventual government debt. Thus, they will raise their own private saving to offset the fall in government saving. Governments that lower their deficits will induce the private sector to lower its own saving. However, this doesn't hold in practice. Economists attribute only half of the decline in European private saving to Ricardian effects.
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The federal government is concerned about the negative effects of cigarette smoking in the United States. Suppose Congress is considering two plans. One plan would limit the production of cigarettes. The other would require manufacturers to include graphic photos on cigarette packages of people suffering cancer's effects. Which of the following statements is true?
a. Both programs would increase the price of cigarettes. b. Both programs would reduce the quantity of cigarettes sold. c. Both programs would decrease revenues for cigarette manufacturers. d. All of the above are correct.
The value of the marginal product of any input is equal to the marginal product of that input multiplied by the
a. wage. b. marginal cost of the output. c. change in total profit. d. market price of the output.
If an unemployed person quits looking for work, then, eventually the unemployment rate
a. decreases, and the labor-force participation rate is unaffected. b. and the labor-force participation rate both decrease. c. is unaffected, and the labor-force participation rate decreases. d. and the labor-force participation rate are both unaffected.
During times of high unemployment, colleges often observe an increase in enrollment even if tuition remains unchanged. Why?
A. The benefit of attending college is lower because college graduates are less likely to find jobs. B. The opportunity cost of attending college is higher when unemployment is high. C. The opportunity cost of attending college is lower when unemployment is high. D. Students go to college even when the net benefit is negative.