The Logic of Ricardian Equivalence Implies That

question 16

Multiple Choice

The logic of Ricardian equivalence implies that:

• A) tax cuts do not influence consumer spending but changes in government spending do.
• B) neither tax cuts nor changes in government spending affect consumer spending.
• C) tax cuts combined with future decreases in government spending will decrease consumer spending.
• D) if the government cuts taxes and increases current government spending, consumer spending will increase.

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Definitions:

Deadweight Loss

A loss in social welfare that occurs when market equilibrium is not achieved due to externalities or market control.

Tax Structure Proposals

Recommendations or plans put forward to modify how taxes are imposed by the government, which can include changes in tax rates, bases, or the introduction of new taxes.

Pretax Income

The amount of income earned by an individual or corporation before taxes are deducted.

Benefits Principle

A taxation principle that states those who benefit from government services should pay in proportion to the amount they benefit.