Chapter 17 Deficits

"Budget deficits should be avoided, even if the economy is below potential, because they reduce saving and lead to lower growth." Does this policy directive follow from the short-run or the long-run framework? Explain your answer.
Answer:
Long-run framework. The long-run framework directs one to avoid deficits; in the short-run framework deficits are useful if the economy is significantly below potential. Short-run framework. The short-run framework directs one to avoid deficits; in the long-run framework deficits are useful if the economy is significantly below potential.

What are the two ways government can finance a budget deficit?
Answer:
Selling bonds.
Buying stock in financial institutions.

How would your answer to question 9 differ if you knew that expected inflation was 15 percent?
Answer:
Expected inflation does not change the structural deficit and the passive surplus.

List three ways in which individual debt differs from government debt.
Answer:
Government debt can be inflated away; people can’t.
The government lives forever; people don’t.
The government can print money to pay its debt; people can’t.
Government owes much of its debt to itself—to its own citizens.
Governments can’t go bankrupt; people can

If all of the government’s debt were internal, would financing that debt make the nation poorer?
Answer:
No. Financing internal debt causes redistribution; it does not make the society poorer.

Why is debt service an important measure of whether debt is a problem?
Answer:
Because interest payments are the result of past expenditures and do not result in additional productive expenditures. They are the burden of the debt: if the debt service is large and is hurting the government’s ability to fund today’s expenditures, that debt could be considered a problem