Question

6:41 PM Wed Oct 30 TODO+ Xaxes) may be advantageous because 54% + 8 0 A) it discourages credit-constrained consumers from borrowing too much. B) it increases the welfare of credit-constrained consumers. C) it eliminates the problems that cause credit market imperfections. D) it encourages more private savings. E) the government borrows at higher interest rates than consumers. 6) f current taxes fall by $100, and future taxes rise by S100, it leads to A) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving. B) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving. C) a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving. D) a decrease in first-period consumption, a decrease in second-period consumption, and a decrease in saving. E) no change in current consumption, future consumption or saving. 7) If government spending is held constant and Ricardian equivalence holds, A) an increase in the government budget deficit is always matched by a decrease in private saving. B) an increase in government savings is always matched by an increase in the government budget deficit. C) an increase in government savings is always matched by an equal increase in private savings. D) an increase in government savings is always matched by an equal reduction in private

i understand why a decrease in tax will increaseconsumotion but i dont understand why a future tax raise will also increase consumption.

in this case, does ricardian equivalence hold? thank you

Answer 1

6.

Correct option: B

Reason: A decrease in tax today will leave consumers with higher disposable income in hand and thus increase their consumption and savings.

An increase in tax in the future will although reduce consumer disposable income, but he will then use his previous time period's saving to make consumption purchases in the future. This will increase his consumption in the future as well.

7.

Correct option: D

Reason: Ricardian equivalence states that consumers are future looking individuals and always try to internalize budget constraint of government when making their consumption decisions.

This means if there is an increase in government savings, then consumers will try to match to it by reducing private savings