In a Two-Period Model,holding Everything Else Constant,an Increase in Future

question 6

Multiple Choice

In a two-period model,holding everything else constant,an increase in future taxes

• A) unambiguously increases the current account surplus.
• B) unambiguously decreases the current account surplus.
• C) has an uncertain effect on the current account surplus.
• D) has no effect on the current account surplus, as long as Ricardian equivalence holds.

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Definitions:

Standard & Poor's

A financial market intelligence company known for its stock market indices such as the S&P 500, as well as its credit ratings of borrowers.

Liquidity Preference Theory

A theory that suggests investors demand a higher interest rate or premium on securities with longer maturities to compensate for the increased risk of holding them.

Term Structure

The relationship between interest rates or bond yields and different terms to maturity, represented graphically by the yield curve.

Interest Rates

The amount charged by lenders as a percentage of the amount borrowed, representing the cost of borrowing money.