Suppose the government cuts taxes and increases spending, raising the budget deficit to 12 per cent of

Question:

Suppose the government cuts taxes and increases spending, raising the budget deficit to 12 per cent of GDP.

If nominal GDP is rising 7 per cent 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 do something today to offset this future effect?

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