Ricardian Equivalence Argues That When the Government

question 20

Multiple Choice

Ricardian equivalence argues that when the government

• A) increases taxes and raises its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting government debt, thus people will raise their own private saving to offset the fall in government saving.
• B) cuts taxes and decreases its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting government debt, thus people will raise their own private saving to offset the fall in government saving.
• C) cuts taxes and raises its surplus, consumers anticipate that they will face higher taxes later to pay for the resulting government debt, thus people will raise their own private saving to offset the fall in government saving.
• D) cuts taxes and raises its deficit, consumers anticipate that they will face lower taxes later to pay for the resulting government debt, thus people will raise their own private saving to offset the fall in government saving.
• E) cuts taxes and raises its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting government debt, thus people will raise their own private saving to offset the fall in government saving.

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Definitions:

Excess Burden

The cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.

Tax Revenue

The income that is collected by the government through various forms of taxation.

Excess Burden

The expense incurred by society due to market inefficiency, happening when there's a mismatch between supply and demand.

Tax Revenue

The earnings achieved by governments by levying taxes.