According to Ricardian Equivalence, an Increase in Government Expenditure Without

question 8

Multiple Choice

According to Ricardian equivalence, an increase in government expenditure without a proportional tax increase implies that households:

• A) expect future tax increases and will reduce spending today.
• B) expect higher current income and will increase spending today.
• C) expect future tax decreases and will reduce spending today.
• D) expect their incomes to remain constant and will hold spending constant.
• E) do not change their spending patterns.

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Definitions:

Trade-Offs

Decisions made that involve a sacrifice of one thing to obtain another, often used in discussions of economic and personal choices.

Opportunity Cost

This represents the value of the best alternative foregone when a decision to pursue a certain action is made.

Given Budget

A specified sum of money allocated for a particular purpose, often within a fixed time period.

Price

The amount of money or its equivalent paid or charged for a product or service, or the sum of values that consumers exchange for the benefits of having or using the product or service.