The Ricardian Equivalence Theorem Suggests That an Increase in the Government

question 110

Multiple Choice

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

• A)increase real Gross Domestic Product (GDP)in both the short and long run.
• B)decrease real Gross Domestic Product (GDP)in both the short and long run.
• C)decrease real Gross Domestic Product (GDP)in the short run, but increase it in the long run.
• D)have no effect on aggregate demand.

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Definitions:

Consignment

An arrangement where goods are left with a third party to sell, but ownership remains with the supplier until the goods are sold.

Consignee

The retailer in a consigned inventory arrangement.

Retailer

A business entity that sells goods or services directly to consumers through various distribution channels to earn a profit.

Current Replacement Cost

The amount of money it would cost to replace an asset at the present time, considering its current condition.