Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
Textbook Question
Chapter 31, Problem 21CTQ

Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “‘Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes In the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?

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Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes in the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?
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?
According to the Ricardian equivalence theorem, what is the effect of government deficits on private saving? A. Government deficits increase private saving B. Government deficits decrease private saving C. Government deficits have no effect on private saving D. Government deficits only affect public saving

Chapter 31 Solutions

Principles of Economics 2e

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  • Will a budget deficit be more expansionary if it is financed by borrowing from the Federal Reserve or from the general public?  Explain.
    Which of the following sentences correctly describes the budget of the Federal Government of the Unites States during the past six decades?   A. Since 1961, the Government always runs in budget deficits, meaning it spends more money than it receives every year – except for the brief period of 1998 to 2001.   B. Since 1961, the U.S. Government has been an example of how to run a country on a balanced budget, meaning it balances the level of spending with the level of tax revenue.   C. Since 1961, the Government always runs in budget surpluses, meaning it receives more money than it spends every year – except for the brief period of 1998 to 2001.   D. Since 1961, the Government budget doesn’t show a clear trend. About half of the time, the U.S. incurs budget deficits; to compensate for that, the Government runs budget surpluses half of the time too.
    Suppose that Shen, an economist from a research facility in Washington, and Valerie, another economist from an investigative reporting group, are both guests on a popular science podcast. The host of the podcast is facilitating their, debate over budget deficits. The following dialogue represents a portion of the transcript of their discussion: Valerie: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course. of action to remedy this situation. Shen: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits Valerie: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. The disagreement between these economists is most likely due to Despite their differences, with which proposition are two economists chosen at random most likely to agree? Business managers can raise profit more easily by reducing…
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