According to the Ricardian equivalence proposition, a government budget decit created by a O reduces desired investment spending O increases the real interest rate. O does not affect expected future taxes.
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- Compare the traditional view versus the view of Ricardian equivalence of the effects of adebt-financed tax cut on:a. national saving.b. current consumption.c. the real interest rate.Based on the Ricardian Equivalence, explain the impact of the debt-financed tax cut on public saving, private saving, and national saving.Suppose that the federal government ran a sizable budget surplus during the next decade. Compared to balancing the budget, how would this surplus affect interest rates, saving, and investment? Compare and contrast the traditional view and the new classical view.
- Suppose that the classical model of loanable funds displays the following characteristics. GDP (Y) is 5,000 while consumption (C) is given by the equation C = 1,200 + 0.3(Y – T) – 50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1,500 – 50r. Taxes (T) are 1,000, and government spending (G) is 1,500. What are the equilibrium values of C, I, and r? What are the values of private saving, public saving, and national saving? Sketch the equilibrium in the long-run loanable funds model.Suppose that the classical model of loanable funds displays the following characteristics. GDP (Y) is 5,000 while consumption (C) is given by the equation C = 1,200 + 0.3(Y – T) – 50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1,500 – 50r. Taxes (T) are 1,000, and government spending (G) is 1,500. a. What are the equilibrium values of C, I, and r? What are the values of private saving, public saving, and national saving? Sketch the equilibrium in the long-run loanable funds model. (Answered in previous question on my page) b. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 – 50r. Clearly explain how the economy moves to the new equilibrium and compute the new equilibrium values of C, I, and r. What are the new values of private saving, public saving, and national saving? Use the graph you sketched in a) to illustrate and explain the change in the…Suppose that the classical model of loanable funds displays the following characteristics. GDP (Y) is 5,000 while consumption (C) is given by the equation C = 1,200 + 0.3(Y – T) – 50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1,500 – 50r. Taxes (T) are 1,000, and government spending (G) is 1,500. Complete the following tasks. a. What are the equilibrium values of C, I, and r? What are the values of private saving, public saving, and national saving? Sketch the equilibrium in the long-run loanable funds model. b. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 – 50r. Clearly explain how the economy moves to the new equilibrium and compute the new equilibrium values of C, I, and r. What are the new values of private saving, public saving, and national saving? Use the graph you sketched in a) to illustrate and explain the change in the economy. c.…
- As a result of this policy, the equilibrium interest rate . Which of the following statements accurately describe the effect of the increase in government borrowing? Check all that apply. National saving decreases by less than $20 billion. Private saving increases by less than $20 billion. Public saving decreases by exactly $20 billion. Investment increases by less than $20 billion. The more elastic the supply of loanable funds, the is the change in national saving as a result of the increase in government borrowing. The more elastic the demand for loanable funds, the the change in national saving as a result of the increase in government borrowing. Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. This belief would cause people to save today, which would private saving and the supply of loanable funds. This would the…Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2. Now suppose gov't gives consumers a free check of 10 in year 1. Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2). Consumer believes they will consume ____ in year 2. Hint: when consumers are naive, they will believe they have 80+10=90 income in period 1, and 100 income in period 2.Based on the Ricardian equivalence, increased government borrowing by $1 will cause: The public to increase savings by $1 The public to decrease savings by $1 Private investment to increase by $1 Public investment to fall by more than $1
- Which of the following statements about government deficits is correct?a. Deficits should occur during recessionary gaps and surpluses during inflationary gapsb. Governments usually have deficits and rarely have surplusesc. Deficits are politically more popular than surplusesd. All of these statements are correcte. Options a and b are both correct but c is notInclude correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. Suppose that the United States government implements a fiscal policy that increases the budget surplus. (a) Draw a correctly labeled graph of the loanable funds market and show the effect of the increase in the budget surplus on the equilibrium real interest rate. (b) The European Union is a major trading partner of the United States. Given your answer in part (a) about the real interest rate, will the United States dollar appreciate or depreciate against the euro? Explain. (c) Suppose that the Federal Reserve, the central bank of the United States, decides to offset the change in the value of the dollar identified in part (b). (i) Would the Federal Reserve buy or sell the euro? (ii) Would…The current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit.c. How would your conclusion differ if taxpayers fully anticipate future tax increases to offset the increase in the budget deficit?d. Do you think the Ricardian Equivalence is realistic?