Chapter 19

Question 1

Capital budgeting

Answer 1

An accounting procedure that measures both assets and liabilities.

Question 2

Cyclically adjusted budget deficit

Answer 2

The budget deficit adjusted for the influence of the business cycle on government spending and tax revenue; the budget deficit that would occur if the economy’s production and employment were at their natural levels. Also called full-employment budget deficit.

Question 3

Ricardian equivalence

Answer 3

The theory according to which forward-looking consumers fully anticipate the future taxes implied by government debt, so that government borrowing today coupled with a tax increase in the future to repay the debt has the same effect on the economy as a tax increase today.