Question

In response to a tax cut, the consumption of a consumer who is borrowing constrained _____, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence _____. Group of answer choices increases; increases increases; remains unchanged remains unchanged; remains unchanged remains unchanged; increases

Answer 1

Answer:

In response to a tax cut, the consumption of a consumer who is borrowing constrained INCREASES, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence REMAINS UNCHANGED.

Explanation:

The Ricardian Equivalence theory was one of the pillars of the classical monetary policy theory which was the most accepted macroeconomic theory until the Great Depression devastated the American Economy. Ricardian Equivalence stated that a decrease in taxes will not alter consumer spending nor aggregate demand because households will understand that the lower taxes imposed today must be paid tomorrow through higher taxes, so they would simply save more. Franklin Roosevelt replaced the classical monetary theory by the Keynesian theory and was able to pull the New Deal and finally got America out of the Great Depression.