According to the Ricardian Equivalence Theorem, a Tax Cut That

question 246

Multiple Choice

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

• A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures.
• B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present.
• C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present.
• D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending.

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Definitions:

Activity Method

A depreciation method where the asset’s expense is based on its usage or activity level, rather than the passage of time.

Unit Cost

The cost incurred by a company to produce, store, and sell one unit of a particular product or service.

Declining-Balance Method

A method of calculating depreciation that results in larger depreciation charges in the early years of an asset's life and smaller charges later on.

Straight-Line Method

A depreciation technique where an equal amount of depreciation expense is recognized for an asset over each year of its useful life.