Does public debt impose a burden? Explain.
Public debt or government debt is the amount that the Central Government owes. This may be in form of borrowings from bank, public financial institutions, or from other internal and external sources.
The public debt definitely imposes a burden on the economy which is being discussed below –
a) To repay the debt, the government imposes higher tax or get the money printed, which adversely affects the productivity and investment.
b) The burden of debt is transferred to future generation which negatively affects the welfare of younger generation.
c) The government increases the rate of interest on bonds and securities to attract more investment due to which a major part of saving of citizens goes in the hands of government, which lower the private investment.
d) The wealth of the country is drained out in repayment of loan taken from foreign countries and institutions.
Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.
Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?