Question 1

Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the:

Accepted Answer

Tax policy can impact the incentives for individuals and firms to work and invest. For example, lower taxes on businesses can increase their profits and encourage them to invest more, leading to an increase in aggregate supply. Higher taxes on individuals can reduce their incentive to work, reducing the labor force and decreasing aggregate supply.

Question 2

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending ______ public saving and ______ private saving.

Accepted Answer

Ricardian equivalence suggests that when the government cuts taxes without reducing spending, individuals anticipate future taxes to pay off the government's debt. As a result, they increase their savings to prepare for these future taxes, leading to an increase in private saving. However, since the government is not reducing spending, its need for funds remains the same, leading to a reduction in public saving.

Question 3

A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence.

Accepted Answer

In the traditional view, a debt-financed tax cut is believed to increase current consumption because people have more disposable income. However, under Ricardian equivalence, it is argued that individuals anticipate the future tax increases necessary to pay off the debt, so they save the tax cut instead of spending it, leaving current consumption unchanged.

Question 4

A debt-financed tax cut will ______ saving in the traditional view and ______ saving in the view of Ricardian equivalence.

Accepted Answer

In the traditional view, a debt-financed tax cut is believed to decrease saving because individuals have more disposable income to spend. According to Ricardian equivalence, individuals anticipate future taxes to pay off the debt and thus their saving behavior does not change; they save the tax cut to prepare for future tax increases.

Question 5

Assume that nobody cares about the economic well-being of future generations. Then the Ricardian equivalence view of the effect of debt-financed tax cuts is:

Accepted Answer

Ricardian equivalence suggests that people consider future taxes when making current spending decisions. If future generations' well-being is ignored, the equivalence is partially valid because current taxpayers will still bear some future tax burden.

Question 6

Proponents of Ricardian equivalence argue that the relevant decision-making unit is the:

Accepted Answer

Ricardian equivalence suggests that when a government finances spending through debt rather than taxes, it does not affect the total level of demand in the economy. This theory assumes that individuals are part of an "infinitely lived family" that plans its spending over an infinite horizon. They understand that government debt will eventually need to be paid off, likely through future taxation, and thus they save any current tax reductions to pay for future tax increases, leaving their spending unchanged.

Question 7

The logic of Ricardian equivalence implies that:

Accepted Answer

Ricardian equivalence suggests that consumers anticipate future tax increases to offset current tax cuts, leading to no change in consumer spending. However, changes in government spending directly affect consumer spending.

Question 8

The Ricardian view on fiscal policy makes less sense if people are:

Accepted Answer

The Ricardian view on fiscal policy, also known as Ricardian equivalence, posits that government budget deficits do not affect the level of demand in an economy because individuals anticipate future taxes that will be needed to pay off the debt. They save more to pay for these future taxes, offsetting the increase in demand from government spending. This theory assumes individuals are rational and have perfect foresight. Therefore, it makes less sense if people are shortsighted and not fully rational, as they may not adequately plan for future taxes by saving more now.

Question 9

Proponents of Ricardian equivalence argue that if taxes are cut without cutting government spending and taxes are not expected to increase in the future until after an individual expects to be dead, then the individual will:

Accepted Answer

Ricardian equivalence suggests that individuals will anticipate the need for future tax increases to pay off government debt, leading them to save any current increase in income to prepare for those future taxes, potentially leaving it as a bequest.

Question 10

When President George H. W. Bush lowered tax withholding in 1992 without lowering the amount of taxes owed, surveys showed that:

Accepted Answer

Surveys showed that a majority of respondents said they would save the higher take-home pay, but a significant minority said they would spend it. This suggests that although some people chose to save the extra money, many others were likely to spend it instead of using it to pay off debt or save for the future.

Question 11

From the Ricardian point of view, a consumer should not raise his or her consumption when taxes are cut but government spending is not cut because:

Accepted Answer

The answer of From the Ricardian point of view, a...

Question 12

The strategic bequest motive hypothesizes that parents:

Accepted Answer

The strategic bequest motive suggests that parents use the possibility of leaving or withholding bequests as a means to influence or control their children's behavior.

Question 13

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

Accepted Answer

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate a large enough increase in aggregate supply. This is because when taxes are reduced, individuals and businesses have more money to spend and invest, which in turn leads to increased economic activity, production, and ultimately, more tax revenue for the government. However, for this to work, the increase in aggregate supply needs to be significant enough to offset the revenue loss from the tax cuts.

Question 14

All of the following are arguments against Ricardian equivalence except:

Accepted Answer

Ricardian equivalence suggests that consumers are rational and forward-looking, meaning they anticipate future taxes and adjust their spending accordingly. This choice is consistent with Ricardian equivalence, while the others are arguments against it.

Question 15

Ricardian equivalence refers to the same impact of financing government:

Accepted Answer

Ricardian equivalence suggests that it doesn't matter whether the government finances its spending through debt or taxes, as individuals will adjust their savings behavior to account for future tax liabilities. This theory applies in both the short run and the long run, and in both open and closed economies. However, the theory does not apply to financing through printing money, as this can lead to inflation and changes in relative prices in the economy.

Question 16

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.

Accepted Answer

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as a rescheduling of taxes into the future, as they will anticipate that taxes will eventually have to increase to pay for the current tax cut. Therefore, their consumption will remain unchanged, as they will save the additional disposable income from the tax cut in anticipation of future tax increases.

Question 17

Suppose a household considers only current income in making consumption decisions. This is an example of:

Accepted Answer

Myopia is the assumption that people only consider their current income when making consumption decisions, and do not anticipate future changes in income or account for long-term savings and investments. Ricardian equivalence, the permanent-income hypothesis, and the life-cycle model all incorporate some notion of forward-looking behavior and planning for the future.

Question 18

According to the traditional view of government debt (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will ______ and investment will ______.

Accepted Answer

When taxes are cut without cutting government spending, it leads to an increase in the budget deficit. This increases the supply of government bonds, which in turn leads to an increase in the bond yields (interest rates) to attract investors. This increase in interest rates shifts the LM curve to the left, leading to a decrease in investment.

Question 19

In response to a tax cut, the consumption of a consumer who is borrowing-constrained ______, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence ______.

Accepted Answer

A borrowing-constrained consumer is likely to increase consumption in response to a tax cut due to immediate additional disposable income. A forward-looking, unconstrained consumer, under the Ricardian equivalence, would perceive the tax cut as a future tax liability increase and thus, would not change their consumption, as they understand that current government savings will have to be paid back in the future.

Question 20

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would ______ the extra take-home pay, while those facing binding borrowing constraints would ______ the extra-take home pay.

Accepted Answer

Ricardian equivalence suggests that households, anticipating they will have to pay more taxes in the future to offset the government's reduced tax revenue, will save the extra take-home pay rather than spend it. On the other hand, households facing binding borrowing constraints are more likely to spend the extra take-home pay because they have immediate liquidity needs or cannot borrow easily to finance current consumption.

Quiz 19: Government Debt and Budget Deficits

Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the:

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending public saving and private saving.

A debt-financed tax cut will current consumption in the traditional view and current consumption in the view of Ricardian equivalence.

A debt-financed tax cut will saving in the traditional view and saving in the view of Ricardian equivalence.

Assume that nobody cares about the economic well-being of future generations. Then the Ricardian equivalence view of the effect of debt-financed tax cuts is:

Proponents of Ricardian equivalence argue that the relevant decision-making unit is the:

The logic of Ricardian equivalence implies that:

The Ricardian view on fiscal policy makes less sense if people are:

Proponents of Ricardian equivalence argue that if taxes are cut without cutting government spending and taxes are not expected to increase in the future until after an individual expects to be dead, then the individual will:

When President George H. W. Bush lowered tax withholding in 1992 without lowering the amount of taxes owed, surveys showed that:

From the Ricardian point of view, a consumer should not raise his or her consumption when taxes are cut but government spending is not cut because:

The strategic bequest motive hypothesizes that parents:

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

All of the following are arguments against Ricardian equivalence except:

Ricardian equivalence refers to the same impact of financing government:

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as , so their consumption will .

Suppose a household considers only current income in making consumption decisions. This is an example of:

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will and investment will .

In response to a tax cut, the consumption of a consumer who is borrowing-constrained , whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence .

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would the extra take-home pay, while those facing binding borrowing constraints would the extra-take home pay.

Quiz 19: Government Debt and Budget Deficits

Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the:

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending ______ public saving and ______ private saving.

A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence.

A debt-financed tax cut will ______ saving in the traditional view and ______ saving in the view of Ricardian equivalence.

Assume that nobody cares about the economic well-being of future generations. Then the Ricardian equivalence view of the effect of debt-financed tax cuts is:

Proponents of Ricardian equivalence argue that the relevant decision-making unit is the:

The logic of Ricardian equivalence implies that:

The Ricardian view on fiscal policy makes less sense if people are:

Proponents of Ricardian equivalence argue that if taxes are cut without cutting government spending and taxes are not expected to increase in the future until after an individual expects to be dead, then the individual will:

When President George H. W. Bush lowered tax withholding in 1992 without lowering the amount of taxes owed, surveys showed that:

From the Ricardian point of view, a consumer should not raise his or her consumption when taxes are cut but government spending is not cut because:

The strategic bequest motive hypothesizes that parents:

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

All of the following are arguments against Ricardian equivalence except:

Ricardian equivalence refers to the same impact of financing government:

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.

Suppose a household considers only current income in making consumption decisions. This is an example of:

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will ______ and investment will ______.

In response to a tax cut, the consumption of a consumer who is borrowing-constrained ______, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence ______.

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would ______ the extra take-home pay, while those facing binding borrowing constraints would ______ the extra-take home pay.

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending public saving and private saving.

A debt-financed tax cut will current consumption in the traditional view and current consumption in the view of Ricardian equivalence.

A debt-financed tax cut will saving in the traditional view and saving in the view of Ricardian equivalence.

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as , so their consumption will .

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will and investment will .

In response to a tax cut, the consumption of a consumer who is borrowing-constrained , whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence .

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would the extra take-home pay, while those facing binding borrowing constraints would the extra-take home pay.