Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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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
Ch. 31 - In a country, private savings equals 600, the...Ch. 31 - Assume an economy has a budget surplus of 1,000,...Ch. 31 - In the late 1990s, the U.S. government moved from...Ch. 31 - Imagine an economy in which Ricardian equivalence...Ch. 31 - Why have many education experts recently placed an...Ch. 31 - What are some steps the government can take to...Ch. 31 - Based on the national saving and investment...Ch. 31 - How would you expect larger budget deficits to...Ch. 31 - Under what conditions will a larger budget deficit...Ch. 31 - What is the theory of Ricardian equivalence?
Ch. 31 - What does the concept of rationality have to do...Ch. 31 - What are some of the ways fiscal policy might...Ch. 31 - What are some fiscal policies for improving a...Ch. 31 - What are some fiscal policies for improving the...Ch. 31 - Explain how cuts in funding for programs such as...Ch. 31 - Assume there is no discretionary increase in...Ch. 31 - Explain how decreased domestic investments that...Ch. 31 - The U.S. government has shut down a number of...Ch. 31 - Explain how a shift from a government budget...Ch. 31 - Describe how a plan for reducing the government...Ch. 31 - Explain whether or not you agree with the premise...Ch. 31 - Explain why the government might prefer to provide...Ch. 31 - Under what condition would crowding out not...Ch. 31 - What must take place for the government to run...Ch. 31 - Sketch a diagram of how a budget deficit causes a...Ch. 31 - Sketch a diagram of how sustained budget deficits...Ch. 31 - Assume that the newly independent government of...Ch. 31 - Illustrate the concept of Ricardian equivalence...Ch. 31 - During the most recent recession, some economists...
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Similar questions
- Answer the following questions: As you know, the US government has been running budget deficits for several years now. In your opinion, and based on economic reasoning, what will happen to the US economy if the US Federal Government continues to run annual budget deficits for the next decade. Will the economy survive that? Will the economy grow? Will it grow as fast as it could? Will the deficits cause the economy to grow faster? Will it grow at all? These are some of the questions you might address in your primary post.arrow_forwardBriefly explain how a budget deficit arises and what corresponding action is typically by taken by a government in this type of circumstance.arrow_forwardBriefly explain whether each of the following statements is true or false. 2. According to the Ricardian equivalence proposition, a deficit-financed tax cut will be entirely saved by households.arrow_forward
- Will a budget deficit be more expansionary if it is financed by borrowing from the Federal Reserve or from the general public? Explain.arrow_forwardWhich 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.arrow_forwardSuppose 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…arrow_forward
- Suppose the US Federal Government decides to engage in deficit spending whereby it increases its expenditure through debt financing. Which of the following statements describes deficit spending's short-run and long run affects on real GDP? A) Real GDP rises above the natural level in the short run, but it returns to the natural level in the long run.B) Real GDP remains at the natural level in both the short run and the long run.C) Real GDP falls below the natural level in the short run, but it returns to the natural level in the long run.D) Real GDP rises above the natural level in both the short run and the long run.arrow_forwardBriefly analyse the various policy measures that a government might have to undertake to deal with and finance a growing fiscal deficitarrow_forwardWhich of the following, regarding debt and growth, is false? a. If there is no (nominal) GDP growth, the debt/GDP ratio can only be reduced through fiscal surplus. b. Furman and Summers argue that the debt/GDP ratio is a misleading measure of a country's debt burden in an era of low interest rates. c. The burden of a dollar borrowed by the government today decreases over time—relative to GDP—if the interest rate on government debt is larger than the nominal economic growth rate. d. Blanchard and Leigh found that, following the Great Recession, countries that enacted fiscal austerity had less economic growth than they expected, and vice- versaarrow_forward
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