Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 27: Problem 11

A political columnist wrote the following: Today ... the main purpose [of governments issuing bonds] is to let craven politicians launch projects they know the public, at the moment, would rather not fully finance. The tab for these projects will not come due, probably, until after the politicians have long since departed for greener (excuse the expression) pastures. Do you agree with this commentator's explanation for why some government spending is financed through tax receipts and other government spending is financed through borrowing, by issuing bonds? Briefly explain.

Short Answer

Expert verified
While the aspect of the politicians' term in relation to bond repayment is thought-provoking, it's a narrow interpretation. Both tax receipts and bonds have their roles and implications in public finance. Deciding whether to use taxes or borrowings depends on multiple factors such as the nature of the project, fiscal policy, and economic conditions, not just political motives.

Step by step solution

01

Understanding the Scenario

The commentator's explanation suggests that governments issue bonds to finance projects that the public may not want to directly pay for through taxes. This is due to the fact that repayment of bonds potentially isn't due until future periods, possibly when current politicians aren't in office anymore. This prevents the immediate burden of financing from falling on the public through increased taxes.
02

Analyzing Tax Receipts

Taxes are a primary source of revenue for governments. They are relatively stable and predictable, providing consistent cash flow for ongoing operations and commitments. However, sudden, drastic increases in tax rates to fund large-scale projects could lead to public discontent and even economic disruption. Thus, taxes are primarily used for ongoing public expenditure and obligations.
03

Examining Borrowing through Bonds

Borrowing through bonds allows governments to mobilize large sums of money without immediate repayment obligations. This prevents sudden increases in tax rates and spreads the financial burden over a period of time. This can be particularly beneficial for large-scale, long-term projects and investments that payoff incrementally over time, but require substantial upfront costs.
04

Formulating Opinion

Considering these points, it can be partly agreed with the commentator's explanation. However, saying politicians issue bonds to avoid accountability or public opinion is a narrow view. The decision to borrow or tax is not only based on political convenience, but also on economic feasibility, nature of expenditure, and fiscal health of the government. It needs a balanced approach for sustainable public finance.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP. a. Is this outcome most likely to occur if the private spending being crowded out is consumption spending, investment spending, or net exports? Briefly explain. b. In terms of its effect on the long-run growth rate of real GDP, would it matter if the additional government spending involves (i) increased spending on highways and bridges or (ii) increased spending on national parks? Briefly explain.

Why does a higher income tax rate reduce the multiplier effect?

An article in the Wall Street Journal stated that "Japan's cabinet approved a government stimulus package that includes \(¥ 7.5\) trillion (\$73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation's sluggish economy." a. Draw an aggregate demand and aggregate supply graph that shows where the Japanese government expects the economy to be without the stimulus package. Briefly explain what you graph shows. b. In the same graph, show the effect of the stimulus package on the economy. Briefly explain what your graphs shows.

Use an aggregate demand and aggregate supply graph to illustrate the situation where equilibrium initially occurs with real GDP equal to potential GDP and then the aggregate demand curve shifts to the left. What actions can Congress and the president take to move real GDP back to potential GDP? Show the results of these actions on your graph. Assume that the long-run aggregate supply (LRAS) curve doesn't shift.

As indicated in the chapter, the CBO forecast that real GDP would grow at an average annual rate of 1.9 percent from 2017 to 2027 . The Trump administration pledged to raise the growth rate to 3 percent, although some policymakers and economists were skeptical that this goal could be achieved. Yet from 1960 to \(1969,\) real GDP grew at an average annual rate of 4.5 percent. Briefly discuss the factors that make growth rates that high more difficult to achieve today.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free