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:

Bonds Issuance

The process of offering bonds to investors as a means of raising capital for the issuer.

Face Amount

The nominal or dollar value stated on a financial instrument or security, such as the original amount on a bond or insurance policy.

Bond Redemption

The process of repaying the principal amount of a bond at its maturity date.

Carrying Value

The book value of an asset on a company's balance sheet, calculated as the asset’s original cost minus accumulated depreciation and impairment charges.