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Chapter 18: Q.28 (page 452)

Illustrate the concept of Ricardian equivalence using the demand and supply of financial capital graph.

Short Answer

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Ricardian Equivalence :

Ricardian Equivalence is a term used to describe the equivalence

Governments can finance their spending by printing new money, levying taxes, or issuing bonds. Bonds are advances, thus they should be repaid eventually, most likely by raising government rates. As a result, the choice is 'tax now or tax later.'

Step by step solution

01

Definition

Ricardian Equivalence :

Ricardian Equivalence is a term used to describe the equivalence

Governments can finance their spending by printing new money, levying taxes, or issuing bonds. Bonds are advances, thus they should be repaid eventually, most likely by raising government rates. As a result, the choice is 'tax now or tax later.'

02

Explanation

The graph depicts how increasing capital demand from government borrowing is satisfied by an equal rise in private savings or capital supply.

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Most popular questions from this chapter

What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?

Explain why the government might prefer to provide incentives to private firms to do investment or research and development, rather than simply doing the spending itself?

Why have many education experts recently placed an emphasis on altering the incentives that U.S. schools face rather than on increasing their budgets? Without endorsing any of these proposals as especially good or bad, list some of the ways in which incentives for schools might be altered.

Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.

During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by the government in investment offsets the deficit demand.
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