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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are maintained for 20 years, what is likely to happen to your taxes and your children's taxes in the future? Can you personally do something today to offset this future effect?

To determine

Budget deficit and future taxes.

Explanation

Suppose the budget deficit is 12% of GDP and nominal GDP is rising 5% each year, then the ratio of debt to income is 125 (which is a fairly high level). To be sustainable, the debt and GDP must grow at the same rate. Since the deficit is 12 percent of GDP (which is growing 5 percent per year), the constant ratio of debt to income

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