Chapter 18: 24 (page 451)
What must take place for the government to run deficits without any crowding out?
Government to run deficits without any crowding out there must be a scarcity of private capital.
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Assume that the newly independent government of Tanzania employed you in 1964. Now free from British rule, the Tanzanian parliament has decided that it will spend 10 million shillings on schools, roads, and healthcare for the year. You estimate that the net taxes for the year are eight million shillings. The government will finance the difference by selling 10-year government bonds at 12% interest per year. Parliament must add the interest on outstanding bonds to government expenditure each year. Assume that Parliament places additional taxes to finance this increase in government expenditure so the gap between government spending is always two million. If the school, road, and healthcare budget are unchanged, compute the value of the accumulated debt in 10 years.
During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by the government in investment offsets the deficit demand.
Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.
What does the concept of rationality have to do with Ricardian equivalence?
Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
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