The Ricardian Equivalence theorem suggests that a tax cut fi…

The Ricardian Equivalence theorem suggests that a tax cut financed by government borrowing has NO effect on AD because households, anticipating future tax increases to repay the debt, save the entire tax cut. If Ricardian Equivalence held perfectly, what would the tax multiplier equal?

Policymakers observe that the economy is in a recessionary g…

Policymakers observe that the economy is in a recessionary gap (Y < Y_N). They debate (i) expansionary fiscal policy, (ii) waiting for self-correction, or (iii) expansionary monetary policy. Compare all three options in terms of their effect on the long-run price level.

At the Zero Lower Bound, the Fed uses Quantitative Easing (Q…

At the Zero Lower Bound, the Fed uses Quantitative Easing (QE) by purchasing $1 trillion of mortgage-backed securities (MBS). Compare QE to conventional open market operations in terms of: (i) the assets purchased, (ii) the interest rates targeted, and (iii) the transmission mechanism to AD.