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A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.
Which of the following is best described in the passage given above?
Which of the following is best described in the passage given above?
- a)Ricardian equivalence
- b)Goodhart’s law
- c)Okun's Law
- d)Grandfather clause
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
A government cuts taxes and runs a budget deficit in order to stimulat...
- The Ricardian equivalence theorem (RET) plays an important role in macroeconomic theory. The RET suggests that fiscal stimuli which are defined in terms of deficit-financed public spending hikes or tax cuts will lead to a crowding out of private consumption, thereby decreasing the effectiveness of fiscal policy in boosting economic activity.
- It states that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income. They will understand that borrowing today means higher taxes in the future.
- Further, the consumer will be concerned about future generations because they are the children and grandchildren of the present generation and the family which is the relevant decision making unit, continues living. They would increase savings now, which will fully offset the increased government dissaving so that national savings do not change.
- This view is called Ricardian equivalence after one of the greatest nineteenth century economists, David Ricardo, who first argued that in the face of high deficits, people save more. Hence option (a) is the correct answer.
- It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase today.
- Goodhart’s Law – It was the idea by goodhart which suggests that attempts by a central bank (RBI in case of India) to regulate the level of lending by banks imposing certain controls can be circumvented by the banks searching the alternatives out of regulatory preview.
- Okun's Law is based on the empirical research of Arthur Okun. It describes the relationship between unemployment and growth rate in an economy. The law is still used by policymakers as a rule of thumb to estimate the relationship between growth rate and job creation.
- A grandfather clause is an exemption that allows persons or entities to continue with activities or operations that were approved before the implementation of new rules, regulations, or laws. Such allowances can be permanent, temporary, or instituted with limits.
Most Upvoted Answer
A government cuts taxes and runs a budget deficit in order to stimulat...
C) The paradox of thrift
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A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect answer is option 'A'. Can you explain this answer?
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A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect 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 A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect 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 A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect answer is option 'A'. Can you explain this answer?.
A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect 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 A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect 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 A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today.Which of the following is best described in the passage given above?a)Ricardian equivalenceb)Goodhart’s lawc)Okuns Lawd)Grandfather clauseCorrect answer is option 'A'. Can you explain this answer?.
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