To analyze Ricardian equivalence using the neoclassical consumption model, we must:
A) remove taxes from the present value of wealth.
B) include inflation in the intertemporal budget constraint.
C) treat the discount factor as greater than one.
D) use nominal, rather than real, interest rates.
E) assume that marginal utility is constant.

Question

Quizplus · Accepted Answer

In Ricardian equivalence, taxes are considered neutral in terms of their effect on consumption, so they are removed from the present value of wealth to analyze the impact of government borrowing and taxation on consumption.

To Analyze Ricardian Equivalence Using the Neoclassical Consumption Model, We