Question

1. Whether or not deficits create a burden depends on how and why the government incurred the deficits in the first place. Explain.

2. Explain why the portion of the national debt owed to foreigners is a serious matter, whereas the portion owed to U.S. citizens is of less concern. Why does the U.S. national debt pose less of a problem than the debts of Greece in 2010?

Answer 1

1)

The rise in the deficit leads to an increase in government debt. The government debt is an accumulation of deficits over a period of time.

The rise in government debt does not always pose a problem for future generations. The deficit can be a problem if it is incurred in the unproductive and transfer activities. The unproductive expenditure by government, does not cause rise in the GDP level. Thus, the government does not have sufficient wherewithal to pay off the debt in the future, and future generation would find their consumption declining owing to the servicing of debt raised in the past years.

Rise in the deficit is not problem however, if the spending by the government is earnmarked for the productivie activities. the productive activities generate the sufficient amount of GDP or fund to payoff the debt.