Exercise 7: Government Budget:

1. Why do some economists argue that budget deficits contribute to increased market rates of interest and reduce private investments?
2. What is Recardian Equivalence? Why does it imply that budget deficits cannot influence interest rates?
3. What is the significance of the distinction of between internal debt and external debt?
4. In what sense does the use of debt financing by a national government impose a burden on the future generation? How does debt financing increase the wealth of of the current generation compared to tax financing? Under what circumstances will the burden of the debt on future generations be offset?