The Theory of Ricardian Equivalence Argues That Expansionary Fiscal Policy

question 95

Multiple Choice

The theory of Ricardian equivalence argues that expansionary fiscal policy:

• A) will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.
• B) is not effective because it causes higher interest rates and crowds out investment spending.
• C) is effective, but contractionary fiscal policy is not.
• D) is more effective than expansionary monetary policy.

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Definitions:

Actuate

To cause a mechanical system or device to operate.

Air Tanks

Reservoirs used in pneumatic systems of vehicles, especially in air brake systems, to store compressed air needed for the operation of brakes and other components.

Diversification

The strategy of spreading investments among different financial instruments, industries, or other categories to reduce risk.