Question

9. In which case Ricardo's equivalent is not valid ( )

A Government tax has a large time span, tax cuts for the present generation, taxation of their next generation

B Tax system for proportional taxation

C There are credit constraints

D above is correct

13. If the consumer's lifetime wealth increases, the current labour supply ( )

A Increase

B Reduction

C Unchanged

D Not sure

14. The factors that influence demand for consumer goods in the current period are ( )

A Current income of consumers

B The present value of tax payable by consumers

C Real interest rate

D above is correct

Answer 1

9. answer is: B. tax system for proportional taxation

Proportional taxation means that the government has decided a fixed amount of tax to be recovered from each person per say $100 tax per person from a person earning $900 means an 11.11% tax. now as the person's income rises to $1000, government will still charge $100 tax as it has predecided the amount it wants to collect, so the tax falls to 10% for person. Under such a situation, as people know that with increase in income the amount of tax will remain the same, they will increase their future consumption and ricardo equivalence principle will fail as government gets the predecided amount it wants to invest to boost GDP and consumer spending also increase as they already know that tax will remain the same. This will result in an increase in GDP.

13. answer is: B. Reduction

This is because of the tradeoff between leisure and income. As a person's wealth increases the person may feel that he now needs to do less of work to earn atleast the same level of income as before or will earn more income by giving less hours of effort. This will induce the person to work less and thus supply of labour in the market will decrease as workers give less of their time to work and more time to leisure.

14.answer is: D. above is correct

This is because the income of a person, income left after paying the tax for which tax amount is considered and real interest rates affect the demand for consumer goods. Income and disposable income determine the amount a person can spend on the consumer goods while interest rates have the income-substitution effect on consumer goods as if real interest rates are high, they will spend less and save more as they get more returns and utility from saving than from spending and if real interest rates are low, they will spend more and save less as they get less returns and utility from saving than from spending.