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:

Financial Statements

Reports that provide an overview of a company's financial condition, including income statement, balance sheet, statement of cash flows, and statement of changes in equity.

Capital Assets

Long-term assets that a business uses in its operations and that are not intended for resale, such as property, plant, and equipment.

Deferral Method

An accounting practice that involves postponing the recognition of revenue or expenses until a future date.

Restricted Fund Method

An accounting practice for nonprofit organizations, segregating funds according to restrictions imposed by donors.