2. Can growing national debt leave to gnt bankruptcy?

- NO. Reasons:

*Gnt may refinance its debt (gov may issue new bonds & bills, & receiving money pay all debts)

*Gnt may impose new taxes or increase tax rates in order to repay the debt

*Gnt may simply issue new money (not effective, resultinfl)

National debt has real burden for economy:

1. Increasing the inequality in the distribution of income, because ppl have unequal amount of gnt securities. Tose who have more gov securities are wealthier.

2. Distorting effect of internal debt on incentives (to make debt smaller gov increases taxesleads to  in bus activitiesppl have less incentives to spendprofits & incomes)

3. Decrease in national wealth in the case of growing external debt (if a great part of debt is externalnat wealth  (we pay interest for this debt to foreign banks))

4. Economic and political dependence (If a country experiences growing ext nat debt, foreign creditors may dictate conditions & may influence political & social situation)

5. Crowding out effect. When increased GE divert money and resources away from the private sector. During the refinancing of gov debt interest debt ­ ® less investment, less consumption, decrease in stock of capital. If gnt doesn’t invest itself, total investment will be crowed out.

Fiscal policy

1. Automatic fiscal stabilizers

2. Discretionary fiscal policy

3. The effectiveness of fiscal policy

FP is the manipulation of the gnt of its expenditures or tax revenues in order to expand (­) or contract (¯) AD in the economy. GE policy + Tax policy = Fiscal policy

FP may be expansionary (increase in GE, decrease in taxes or both; aimed to ­AD) or concretionary (¯GE or ­taxes or both, in order to ¯AD, f.e. period of inflation).

These are two main goals of the FP:

1. To protect fundamental disequilibrium in the economy (to close or to remove inf/deflationary gaps)

2. To smooth out business fluctuations in the economy (to stabilize economic growth) ¯ both recession and boom.

There are 2 fiscal ways to stabilize economy:

1. Automatic fiscal stabilizers and 2. Discretionary fiscal policy.

1. Automatic/”built-in” stabilizers

Automatic stabilizer – any mechanism in the economy that automatically, i.e. without gnt intervention, reduces the amount by which output Δ in response to a Δ in AD.

Automatic fiscal stabilizer – tax revenues that automatically rise & gnt transfer payments that automatically fall as Y rises (and v.v.)

Operation of stabilizers:

If Y­ ® ¯T revenues, ¯G transfer payments ® ¯Y® fiscal stabilizers reduce the upward movement of Y

If Y¯ ® ¯ T revenues, ­ G transfer payments ® ­ Y

Automatic fiscal stabilizers increase budget deficit or decrease budget surplus in the recession & v.v.

Size of stabilizing effect of the tax revenues

W1- economy with high tax propensity ­mpt; W2 – economy will low mpt. Assume ­Y ® different influence in 1&2 economy. Y1<Y2 ® stabilizing effect in the 1 economy will be bigger due to decrease in multiplier. ­mpw®¯k