Reference no: EM131588914

Short Answers on Government Spending

Note: Answer all questions in the context of chapters 12-14.

1: What would happen to consumption, saving, and work if we had a lump sum tax of $1000 this year and a lump sum transfer of $1000 ·(1 + r) next year? (With r as the interest rate). Would your answer be different if we had a lump sum transfer of $1000 this year
and a lump sum tax of $1000(1+r) next year?

2: What would happen to consumption, saving, and work if the government borrowed a bunch of money to pay a lump sum transfer of $1000 today and only paid the interest payments on the debt it took out from then on out (didn't change any other behavior).

3: If the government announced they were going to reduce the income tax temporarily next year, financed by additional borrowing, what would happen to labor? To consumption?

4: What would happen to consumption, saving, and work if the government borrowed money to buy goods households would have purchased for themselves? (For instance, it bought a bunch of bags of Cheetos that it then gave to households, who were planning on
buying them anyway, before the tax).

5: What would happen to consumption, saving, and work if the government borrowed money to wage war and only paid the interest payments on the debt it took out from then on out (didn't change any other behavior)?

6: What would happen to consumption, saving, and work if the government paid for the war with taxes today, rather than borrowing money?

7: If the government announced that they were going to reduce the income tax next year, financed by finding a large and previously-unknown warehouse of real goods. What would happen to labor? To consumption? What if they reduced the income tax permanently instead?

8: In Chapter 12, Barro claims that Figure 12.7 provides a good test for our model. Cogently criticize this claim.