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Chapter 27: Problem 5

Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their readers' questions regarding the federal government's debt. The following were two of the questions. Write a brief response to each question. a. Why is government debt different from mine? b. How important is it to pay off this debt?

Short Answer

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a. Government debt is different from personal debt because it is seen as an investment towards the future growth of a country and can often be sustainable as the economy grows. Governments can also raise money through taxation or creating more currency, options that aren't available to individuals. \n\nb. The importance of paying off this debt is debatable. While some economists believe that high governmental debt can lead to higher interest rates or inflation, others argue that paying off the debt too quickly could stunt economic growth by reducing spending. Therefore, the management of government debt should abide by a balanced approach, acknowledging fiscal responsibility while also considering the role of government spending in encouraging economic growth.

Step by step solution

01

Identifying the distinction between personal debt and government debt

Personal debt is the amount of money borrowed by individuals that needs to be repaid, often with interest. If an individual can't handle their debt, they may declare bankruptcy. Government debt, however, differs because it is often not intended to be repaid in the same way. Government debt can be seen as investment in future growth, and it's often sustainable as long as the rate of economic growth exceeds the interest rate on the debt. Governments, unlike individuals, can also raise money through taxation or creating more currency.
02

Discussing the importance of paying off government debt

The importance of paying off government debt is a topic of much debate among economists. Some economists argue that high government debt levels could potentially lead to higher interest rates or inflation. However, others believe that attempts to pay down the debt too quickly could slow economic growth by reducing spending. It's important to recognize that managing government debt should be balanced, considering both the need for fiscal responsibility and the role of government spending in stimulating economic growth.

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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.

Suppose that at the same time that Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run?

What is the difference between federal purchases and federal expenditures? Are federal purchases higher today as a percentage of GDP than they were in \(1960 ?\) Are federal expenditures as a percentage of GDP higher?

In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argued that the European Union, an organization of 28 countries in Europe, should appoint "a commissioner for budgetary discipline." They said that "the new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits." What is an "excessive" budget deficit? Does judging whether a deficit is excessive depend in part on whether the country is in a recession? How can budgetary policies be used to reduce a budget deficit?

In The General Theory of Employment, Interest, and Money, , ohn Maynard Keynes wrote: If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise \(\ldots\) to dig the notes up again \(\ldots\) there need be no more unemployment and, with the help of the repercussions, the real income of the community \(\ldots\) would probably become a good deal greater than it is. Which important macroeconomic effect is Keynes discussing here? What does he mean by "repercussions"? Why does he appear unconcerned about whether government spending is wasteful?
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