According to the Ricardian Equivalence Theorem, Government Deficits Do Not

question 103

Multiple Choice

According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people:

• A)do not understand the relationship between deficits and aggregate demand.
• B)know that current deficits must be paid in the future and therefore reduce savings today.
• C)recognize that current deficits must be paid by future generations and therefore spend more today.
• D)recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes.

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Definitions:

Price Ceiling

A government-imposed limit on how high the price of a product or service can be charged in the market, aimed at protecting consumers from high prices.

Quantity Demanded

The amount of a product or service consumers are willing and able to purchase at a given price.

Quantity Supplied

The amount of a good or service that producers are willing and able to sell at a given price within a certain time period.

Supply Unchanged

A situation in which the quantity of a good or service available in the market does not increase or decrease over a period.