According to the Ricardian Equivalence Theorem, an Increase in Government

question 75

Multiple Choice

According to the Ricardian equivalence theorem, an increase in government spending without any tax increase will not increase aggregate demand because

• A) consumers will consume less and save more to prepare for increased taxes in the future.
• B) the private sector is more likely than the public sector to spend any extra income on national defense.
• C) consumers will increase their consumption proportionately more than Keynesian economists believe they will.
• D) consumers will save less than they otherwise would have.

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Definitions:

Fixed Expenses

Costs that do not change with the level of output or sales, such as rent, salaries, and insurance premiums.

Financial Advantage

A benefit in financial terms, often seen as an edge or superiority in financial health, resources, or opportunities.

Component

A part or element that combines with others to form a whole system or product.

Contribution Margin

The amount of revenue from sales that remains after variable costs are subtracted, useful in determining the profitability of individual products or services.