Question

1. What arguments should be considered in assessing the burden that government debt imposes on future generations?

2. Why is the multiplier for spending changes greater than the multiplier for tax changes? What are the arguments that suggest the expenditure multiplier might be lower than the tax multiplier?

3. How does a supply-side analysis of the effects of a tax cut differ from one that focuses solely on aggregate demand?

4. How does the Ricardian equivalence view of the effects of tax cuts (and budget deficits) differ from the traditional view? What objections to the Ricardian equivalence view have been raised?

Answer 1

• Government borrowing and debt slows down the income growth and increases the interest payments.
• Generally it increases the interest rates and also the risk of financial crisis.
• Higher interest payments can lead to large tax hikes and expenditure cuts.
• Low saving rate will lead to low investments and capital accumulation in the long run.
• Reduction in both public and private investments can slow down the economic growth.
• Future generations might not be able to respond to recessions in such an economic situation of the country.
• National Debt can also depreciate the currency and thus can put downward pressure on the local currency.
• Hence, all of these consequences will increase the burden of future generation as today's borrowing will be compensated from future generation in the form of high taxes.