The figure given below depicts the macroeconomic equilibrium in a country.
Figure 11.3

-Refer to Figure 11.3. Assume that the increase in aggregate demand from AD₁to AD₂ was the result of government spending that was financed by borrowing. Assuming that the Ricardian equivalence holds and people expect taxes to rise in future, the equilibrium income will be:

Question

The figure given below depicts the macroeconomic equilibrium in a country.
Figure 11.3

-Refer to Figure 11.3. Assume that the increase in aggregate demand from AD₁to AD₂ was the result of government spending that was financed by borrowing. Assuming that the Ricardian equivalence holds and people expect taxes to rise in future, the equilibrium income will be:

Quizplus · Accepted Answer

The increase in government spending results in an increase in aggregate demand from AD₁ to AD₂. This leads to a new equilibrium point at a higher income level. However, if people expect taxes to rise in the future to repay the borrowing, they may choose to save more and spend less now, which could decrease consumption and ultimately decrease aggregate demand. This means that the new equilibrium income level will be less than the initial increase in aggregate demand. Therefore, the equilibrium income level will be less than $700 but greater than $500, and the best choice is D.

The Figure Given Below Depicts the Macroeconomic Equilibrium in a Country