Answer to Question #262035 in Macroeconomics for manuewrz

Question

5) Explain briefly the relationship between the government fiscal policy and the level of national debt

6) Briefly distinguish between the Traditional view and the Ricardian view, the effects of government budget deficit on the following: consumption, National Income, unemployment

7) Which two factors limit the Life Cycle Hypothesis and Permanent Income Hypothesis in explaining all of consumption behavior ?

Answer 1

5) Fiscal stimulus that is applied repeatedly has the potential to harm the economy in the long run. Large budget deficits that persist can lead to a rising debt-to-GDP ratio and an unsustainable amount of debt.

6) A debt-financed tax decrease, according to the Ricardian approach, improves current income while leaving permanent income and consumption unaffected. Traditionalists contend that the permanent-income theory should not be relied upon because certain customers are unable to borrow. Those who are unable to borrow can only consume their present income. Consumption is determined by current income rather than permanent income for this person. Ricardian equivalence is an economic theory that states that funding government spending with current taxes or future taxes (and current deficits) has the same overall effect on the economy. This also means that Keynesian fiscal policy will be inefficient at increasing economic output and growth in the long run. Budget deficits, as a proportion of GDP, may fall in times of economic prosperity, according to traditional thinking, since increased tax income, decreased unemployment rates, and increased economic growth lessen the need for government-funded programs like unemployment insurance and Head Start.

7) Modigliani, an economist, proposed the hypothesis. According to the hypothesis, an individual's consumption is determined by his or her predicted lifetime income rather than his or her current income. It is anticipated that the individual will begin earning when he or she reaches the age of 25; otherwise, there would be a period of dissaving. After reaching the age of 65, the individual will once again begin to save. The individual will be saved in the meanwhile. Individuals plan their consumption patterns based on their predicted lifetime income.

The persistent income theory was proposed by Milton Friedman. Individual consumption is based on permanent income rather than relative and absolute income, according to the notion. Consumption is proportionate to a person's long-term earnings. Individuals will spend the money based on their predicted long-term average income. Friedman classified income into two categories: permanent and transient. The term "permanent income" refers to revenue that is expected and planned, such as a wage. Transitory income, on the other hand, is revenue that is unanticipated and for a brief period of time, such as unanticipated gains.