Section II - Extra Study Questions 4 - Answer Key.pdf

Section II - Extra Study Questions 4 - Answer Key.pdf -...

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1 Middle East Technical University Fall, 2016 Department of Economics ECON 202 – Section 2 Instructor: Dr. Pınar Derin-Güre TA: Özgen Öztürk This is NO homework. The purpose is just to provide you extra study material for the midterm exam. Try to solve these questions WITHOUT checking the answer key. Important Note: The level of difficulty of this problem set is not necessarily indicative of the level of difficulty of the final exam. PART I - MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) D 2) E 3) C 4) E 5) B 6) D 7) C 8) E 9) D 10) E 11) A 12) C 13) D 14) B 15) C 16) D 17) D STUDY QUESTIONS #4

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2 18) D 19) B 20) B PART – II ESSAY TYPE QUESTIONS. 1. The Ricardian Equivalence proposition describes the effects of, for example, tax cuts. A tax cut will have no effect on the demand for goods according to the Ricardian Equivalence proposition. A tax cut in the current period will cause an increase in the budget deficit. At some point in the future, say one year, taxes will have to increase to pay off this debt. Individuals will realize this. Once they do, they will realize that the current period tax cut is equivalent to a future period tax increase of the same present value. Hence, they realize that their
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