Question

1.

a) Outline the Ricardian Equivalence Theorem and discuss its usefulness and weaknesses.

b) What will be the likely effects of the recent Trump tax cuts on the US economy in the shortrun and the long run?

Should Canadian taxes be adjusted in response to the Trump tax cuts?

Answer 1

A.David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's engage in international trade even when one country's workers are more efficient at producing every single good than workers in the other countries . Ricardian equivalence also known as the Ricardo-de viti- barrow equivalence theorem.it is an economic hypothesis holding that consumers are forward looking and so internalize the governments budget constraint when making their consumption decisions.

B. critics of president donald trump's tax plan to significantly reduce buisness and personal taxes warned that the cuts would send the deficit skyrocketing by dramatically shrinking federal revenuse.If AD changes then output and unemployment will change in the short run , but not in the long run ... As a result output increases and unemployment decreases . unfortunately , this positive AD shock also mean that inflation increases. An increase in AD leads to an increase in real GDP and the price level..

C. At 20 per cent , the new U.S . tax rate would still be higher than canada's federal corporate tax rate of 15 per cent . But that doesn't mean U.S . corporations would necessarily pay higher taxes. what companies really care about is the overall tax they have to pay on their profits, also known as "effective tax rate ".