Which of the Following Provides the Clearest Statement of the Ricardian

question 19

Multiple Choice

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

• A) Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand.
• B) When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand.
• C) The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future.
• D) A 10 percent reduction in tax rates will reduce tax revenues by 10 percent.

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Definitions:

Securities or Assets

Financial instruments that hold value and can be traded, such as stocks, bonds, or real estate.

Currency Interventions

Actions taken by a country's central bank or government to influence the value of its currency in the foreign exchange market.

Central Banks

National banks that provide financial and banking services for their country's government and commercial banking system, often controlling the national currency and monetary policy.

Managed Floating Exchange Rates

A currency exchange rate system where the currency value is influenced by supply and demand, but with occasional intervention by the central bank.