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1、Chapter 18 Deficit Finance1.a.The government borrowing to finance a Memorial Day parade increases the national debt. In designing an accounting system for the government, the borrowing in this case should, in fact, increase the national debt.b.The sale of the Statue of Liberty to private entrepreneu
2、rs would decrease the national debt under current measurement. In the discussion on capital spending, on pages 458-9, the exercise here is similar to the sale of nondefense federal buildings in 2002. In designing an accounting system, this transaction is simply an exchange of assets and should have
3、no effect on the debt, rather than decreasing the debt. The current system ignores tangible assets.c.The law promising free (future) medical care to children under five affects future spending, not current spending. As such, it does not affect the current measurement of the debt. This is similar to
4、the discussion of the implicit legislative promises about Social Security on page 460. In designing an accounting system, the present value of the entitlement should be counted as a current expense, so the debt should increase. The current system ignores implicit obligations.d.The $100 tax would red
5、uce the size of the national debt. The implicit promise to pay Lynne back $105 next year does not increase the size of the debt, assuming this is similar to the implicit promise to pay Social Security in the future. In designing an accounting system, again, this implicit promise should be counted. A
6、ssuming the present discounted value of the of the $105 paid back next year equals the $100 tax this year, then the impact on the debt should be zero, rather than to decrease it.e.The $100 bond would increase the size of the national debt. The present value of these payments is the amount by which t
7、he bond contributes to the debt. In designing an accounting system for the government, the borrowing in this case should, in fact, increase the national debt.2.Montyons assertion makes sense. Because the excess burden of taxation rises with the square of the tax rate, it is efficient to spread the i
8、ncreases in tax rates over time by borrowing and then repaying the debt with tax revenue. However, if there are distortions in the capital market and the borrowing crowds out capital formation, this result may not hold. If the Ricardian model holds, such crowding out will not occur, and the efficien
9、cy case for borrowing is strengthened. All this assumes that the expenditure in question is a one-time increase, such as a war.3.The arrival of surpluses in the late 1990s, and the subsequent spending spree, are consistent with Milton Friedmans view of deficits and government spending. His view is t
10、hat, “What is predetermined is not spending but the politically tolerable deficits.” Since the deficit is fixed, increases in revenue lead to one-to-one increases in spending.4.If the elasticity is zero, then taxing labor markets creates no distortion. But in the presence of taxes on capital income,
11、 crowding out in the capital market will generate an excess burden. Therefore, use tax finance.5.While this is a matter of opinion, one should note that the effect of a debt reduction on the economy depends on whether that implies higher taxes or reduced spending, as well as the portfolio of reducti
12、ons in spending. Thus, without stipulating how the debt reduction will be accomplished, it is hard to say much about the effect on the economy.6.The benefits-received principle, which states that the beneficiaries of a particular government spending program should pay for it, suggests that deficit finance is appropriate for war if the benefits are received by future generations. An efficiency standpoint would say that debt is appropriate if the expenditure is temporary, and there are not major preexisting distortions in capital markets.