The government has decided to finance a deficit by borrowing (loans) so that consumers' spending will...
The government has decided to finance a deficit by borrowing (loans) so that consumers' spending will not be affected. Which of the following do they seem to be ignoring?
- A. The Laffer Curve
- B. Ricardian Equivalence
- C. Bayesian Posterior
- D. Tweedie's Formula
Homework Answers
Option B.
- By deciding to finance a deficit by borrowing so that consumer's spending will not be affected, the government seems to be ignoring the Ricardian Equivalence.
- According to the concept of Ricardian Equivalence, even if the government spending changes, the consumers remain indifferent and their demand does not change.
- This is because consumer's are more likely to save those amount used to pay off their debt for future tax payments rather than spending it off now.
- Therefore, even if the government Increases it's spending to finance debt, the consumer's demand and level of spending remains the same. The government is thus ignoring this fact.
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government data security and has decided to spend
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issue new government bonds to finance this increase in government
spending. Use the graph below to show the impact of the
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