Chapter 4

Question 1

Evsey Domar

Answer 1

As long as public deficit is fixed as a percentage of GDP (alpha <1) and growth is exogenous and constant, the debt/GDP ratio will converge toward a fixed value

Question 2

Deficit vs Debt

Answer 2

Deficit:

• Is the excess of spending/expenditure over revenues

Debit:

• Debt at a given time is the sum of all past budget deficit
• Debt therefore is the cumulative excess of past spending over past receipts

Question 3

Stock Flow Adjustments

Answer 3

• Is the sum of all changes in the debt level that do not resolve from deficits
• e.g. swiss frank - euro

Question 4

Normative Arguments Public Debt and Deficit

Answer 4

i. Golden Rule (Richard Musgrave)
ii. Smoothing of taxes and reduction of excess burden
iii. smoothing of agg. demand (Keynesian demand managment)

Question 5

Normative Arguments Public Debt and Deficit

i. Goden Rule

Answer 5

• The additional debt handed down to future generations must NOT exceed the additional investment we take

Question 6

Normative Arguments Public Debt and Deficit

ii. smoothing of taxes and reduction of excess burden

Answer 6

• Excess Burden is a convex fct
• tax rates smoothing by allowing for deficits is reducing the discounted excess burden

Question 7

POSITIVE Arguments Public Debt and Deficit

Answer 7

i. Debt illustion rather than Ricardian Equivalance
ii. Ratchet Effect
iii. Binding future Goverments hands
iv. weak position of finance minister
v. expectation of bailout