READ THESE INSTRUCTIONS b efore you start writing: The exam has 4 questions. Your maximal score is 100
p oints. You MUST answer the Mandatory Multiple Choice Question (as the name implies, it is mandatory).
Among the three other questions, you can CHOOSE two of the three non-mandatory to b e answered. You can get
partial credit on all questions. As such, you have a total of 20 mandatory p oints the mandatory question, plus 80
p oints from questions of your choice. Use your time wisely
1. Mandatory Multiple Choice Question (20 Points – 5 p oints each).
1.A Consider the Ricardian Equivalence Prop osition learned in class. Supp ose that a government increases its
de cit B. In doing so, it can either lower taxes ?1 while keeping government exp enditures {G1,G2} xed over
time, or it can x ?1 while increasing G1. According to the Ricardian Equivalence Prop osition, which of the
following answers are FALSE (mark all of them):
a) The increase in the government de cit by more sp ending will lead the government to raise more taxes in
the future.
b) The increase in the government de cit by lowering taxes will lead to an increase in private consumption
to day b ecause it stimulates the economy.
c) The increase in the government de cit by lowering taxes will lead to an identical increase in private savings
that exactly o sets the reduction in taxes, thereby having no e ect on private consumption.
d) The increase in the de cit by sp ending more will lead to a reduction in private exp enditures.
e) The increase in the de cit will have an e ect on output, regardless of the format.