巴罗宏观经济学答案Chapter 14

Chapter 14: Public Debt

Answers to review questions, pg. 368

1. Open market operations are purchases of government bonds by the central bank. The creation of money used to purchase the bonds can be compared to two separate policies: a policy of a one-time increase in the money supply and a reduction in public debt. The increase in the money supply will cause prices to rise, but will have no real effects. If Ricardian equivalence holds then the reduction in public debt also has no real effects.

2. A reduction in next years tax rate on labor income reduces the labor supplied in the current period and increases the labor supplied next year.

3. The conventional view assumes that people fail to recognize the impact of current tax policy on future tax liabilities. As a result, people will tend to misallocate resources over time. In particular, an increase in government bonds will allow government to cut taxes and spur an increase in consumption spending. Ordinarily this would cause the real interest rate to rise and investment would fall. In the theory of Ricardian equivalence, people will see the increase in government bonds as an increase in their future tax liability. They will not change their current consumption, instead savings will increase and real interest rates and investment will not change.

Answers problems for discussion, pg. 368

4. a. The tax cut allows individuals to shift the tax liability onto future generations should they wish to do so. In this case the income effect would increase current consumption and reduce investment. On the other hand, if people care about the the finances of the next generation, they will accumulate savings which will be left to their children (bequest motive) and the income effects will be eliminated.

b. If people don’t have any children then they will be able to shift the burden of the debt onto other people’s children. The bequest motive is weakened, and the income effect is larger than in the previous example.

c. Just as in case b, people may feel that “someone else” will be liable for the future taxes. In this case, a positive income effect is likely.

d. The increase in the stock of money will create inflation, which is a kind of tax. Therefore there is no change in the present value of household income and no income effect.

5. The phased-in income tax cuts changed the after tax real wage rate and generated intertemporal substitution effects on the labor supply. In particular, there would be an incentive to increase leisure in the initial phase and reduce it in later phases. This would create a path for GDP in which it would grow below trend initially and above trend toward the end of the period.

6. a. The capital stock will fall if people view the government program as an increase in current taxes to be offset by a corresponding increase in future transfers. The reduction in current after tax income will be offset by an increase in future after tax income. If the present value of benefits is just equal to the present value of taxes, then people would simply use the credit markets to achieve their desired pattern of consumption over their lifetimes. However, if the present value of expected benefits is higher than current taxes, then there will be an increase in current consumption. This implies a reduction in savings during the initial period which would decrease the rate

of capital accumulation.

b. In a pay as you go system, your savings do not determine your retirement benefit. An increase in current benefits can be achieved by raising taxes on the current generation of workers. Therefore, it is possible to generate the income effects seen in part a- but only if the bequest motive is weak.

If current beneficiaries are concerned about the effect of the current policy on future generations, they could leave larger bequests. On the other hand, the trust fund would clearly eliminate any uncertainty of the matter, since it would be impossible to increase benefits by imposing larger tax burdens on the current generation. Benefits would have to come from the accumulated balance of the trust fund, which is determined by past taxes collected.