Which of the following is a feature of the 'Ricardian Equivalence Theorem'?
A. Government debt is always neutral regardless of agents’ behaviour
B. Tax cuts financed by debt do not affect private consumption because agents anticipate future tax liabilities
C. Tax cuts financed by debt increase private consumption
D. Only liquidity-constrained agents matter
Answer: Option B
Solution (By JKSSB Mock Tests)
Ricardian equivalence asserts that, under certain conditions, debt-financed tax cuts do not stimulate consumption because forward-looking agents save the tax cut to pay the future taxes needed to service the debt.
Explanation:
The Phillips Curve illustrates an inverse relationship between the rate of unemployment and the rate of inflation in an economy in the short run.
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