investigate how the assumption of a binding borrowing constraint can lead to a violation of Ricardian Equivalence. Your analysis should be supported by a clearly labelled diagram
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investigate how the assumption of a binding borrowing constraint can lead to a violation of Ricardian Equivalence. Your analysis should be supported by a clearly labelled diagram
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- A) investigate how the assumption of a binding borrowing constraint can lead to a violation of Ricardian Equivalence. Use a diagram (with explanation) to support your answer.Explain the effects of government borrowing regarding Ricardo's Equivalence Theorem and give the main arguments against this theorem. Thanks.Economic Ricardian equivalence implies that government budget deficits need not crowd out investment spending. True or False
- Illustrate the concept of Ricardian equivalence using the demand and supply of financial capital graph.Ricardian equivalence implies that government budget deficits need not crowd out investment spending. True or FalseSuppose at period t we denote Gt = government expenditure, Bt = government debt, i = interest rate on existing government debt, Tt = net taxes. In period t+1, government budget constraint can be written as, Group of answer choices 1.Gt + iBt = (Bt+1 - Bt) 2.Gt + iBt = Tt + (Bt+1 - Bt) 3.Gt = (Bt+1 - Bt) 4.Gt = Tt + (Bt+1 - Bt)
- Using examples and clearly labelled graphs where applicable answer the following question: Explain the concept of Ricardian Equivalence. Do you believe it holds in practice? Why or why not? Explain.If government expenditure towards infrastructure increases and is deficit financed, then: a. The debt decreases, hence the net-effect of the program on productivity and in turn output (i.e. GDP) may be large. b. The possible crowding-out effect is relatively high, hence the net-effect of the program on productivity and in turn output (i.e. GDP) may be low. c. The possible crowding-out effect is relatively low, hence the net-effect of the program on productivity and in turn output (i.e. GDP) may be large. d. The deficit decreases, hence the net-effect of the program on productivity and in turn output (i.e. GDP) may be large.If the Ricardian equivalence held true, its graphical representation would show: The curve representing government borrowing and the one representing public savings would increase or decrease together. The curve representing government borrowing and the one representing public savings would change in opposite directions (if one rises, the other falls). The curve representing government borrowing and the one representing private investment would increase or decrease together. The curve representing government borrowing and the one representing private investment would change in opposite directions (if one rises, the other falls)
- Consider the following algebraic identity discussed in class: C+I+G+(X-M) = C+S+T Modify the algebraic identity to account for Trade and Federal Budget issues. Identify the magnitude of the U.S. Budget Surplus or Budget Deficit.When a current generation approves a government program that results in a deficit which is paid for through debt, Ricardian Equivalence states: a.Deficit financing and pay-go financing are equivalent as subsidies internalize the debt burden to the current generation. b.Deficit financing and pay-go financing are not equivalent as only taxes internalize the debt burden to the current generation. c.Deficit financing and pay-go financing are equivalent as bequests internalize the debt burden to the current generation.Provide an example demonstrating how government borrowing today can potentially harm future generations. Consider unsustainable levels of debt, excessive interest payments, or burdensome taxation that might hinder economic growth and prosperity for future citizens.