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Which of the following statements defines the Ricardian Equivalence Proposition?
- a)Taxation and borrowing are equivalent means of financing expenditure.
- b)Wealth that can be stored in the form of money for future use.
- c)A system in which the central bank allows the exchange rate to be determined by market forces.
- d)Exchange of commodities without the mediation of money.
Correct answer is option 'A'. Can you explain this answer?
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Which of the following statements defines the Ricardian Equivalence Pr...
Ricardian equivalence
- The theory that consumers are forward looking and anticipate that government borrowing today will mean a tax increase in the future to repay the debt, and will adjust consumption accordingly so that it will have the same effect on the economy as a tax increase today. Hence, option (a) is correct.
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Which of the following statements defines the Ricardian Equivalence Pr...
Definition of the Ricardian Equivalence Proposition:
The Ricardian Equivalence Proposition states that taxation and borrowing are equivalent means of financing expenditure. This theory suggests that individuals are forward-looking and rational, and they will adjust their behavior in anticipation of future taxes.
Explanation:
- When the government increases its borrowing to finance expenditure, it must eventually repay this debt through future taxes.
- According to the Ricardian Equivalence Proposition, individuals understand this and will save more in anticipation of higher future taxes to cover the government's debt repayment.
- As a result, any increase in government borrowing that leads to higher expenditure will be offset by an increase in private savings, resulting in no net effect on the economy.
Implications of the Ricardian Equivalence Proposition:
- The proposition suggests that fiscal policy, such as tax cuts or increased government spending, may not have the intended stimulative effect on the economy.
- It implies that individuals are forward-thinking and will adjust their behavior to account for future tax liabilities, leading to a neutral impact on the economy.
In conclusion, the Ricardian Equivalence Proposition challenges traditional views on the effectiveness of fiscal policy and highlights the importance of considering individuals' forward-looking behavior when analyzing the impact of government borrowing and taxation on the economy.
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Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer?
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Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer?.
Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements defines the Ricardian Equivalence Proposition?a)Taxation and borrowing are equivalent means of financing expenditure.b)Wealth that can be stored in the form of money for future use.c)A system in which the central bank allows the exchange rate to be determined by market forces.d)Exchange of commodities without the mediation of money.Correct answer is option 'A'. Can you explain this answer?.
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