As in the two-period model with endowments, the Ricardian Equivalence theorem ho

Question

As in the two-period model with endowments, the Ricardian Equivalence theorem holds in this model. What is the effect of an increase in current taxes and a cut in future taxes that leaves the present value of taxes unchanged on the credit supply, the credit demand and the real interest rate?

A) The real interest rate increases, and both the credit supply and the credit demand remain unchanged.

B) The real interest rate remains unchanged, and both the credit supply and the credit demand remain unchanged.

C) The real interest rate remains unchanged, and both the credit supply and the credit demand expand in the same magnitude.

D) The real interest rate remains unchanged, and both the credit supply and the credit demand contract in the same magnitude.

The optimal ............... .................... states that the firm invests until the future net marginal product of capital is equal to the real interest rate. (c) The government ....................... .......................... is the ratio of the equilibrium increase in current output to the increase in government expenditure.

Explanation / Answer

option C is correct

output ratio - planned expenditure

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