Q. 14.2LO Evaluate circumstances under whi... [FREE SOLUTION]

Chapter 14: Q. 14.2LO (page 303)

Evaluate circumstances under which the public debt could be a burden to future generations.

Short Answer

Expert verified

The issuance of debt becomes a burden on the long run generation because more taxes are necessary to regain the identical income earned at the arrival of the issuance.

Step by step solution

Introduction

Almost all advanced countries are concerned by the massive amounts of public debts carried over from the past. It seems to be unredeemable within a generation, and thus intergenerational conflicts during this regard are likely to become increasing. However, besides the seminal work of Diamond (1965), who shows that the segregated sequence of intergenerational economic decisions ends in market failure (i.e. dynamic inefficiency) which the issuance of debt prevents the sufficient capital accumulation, other famous studies are rather optimistic about the redemption of debt despite the aforementioned grievous fact.

Evaluation

Each individual possesses the identical utility function

U

U_{t} 鈮� u (c_{1 t}, c_{2 t + 1}) 鈭� 未_{t} 脳 伪, c_{k l} 鈮� {[{鈭�}_{0}^{1} 鈥� {[c_{k l} (蝇)]}^{1 鈭� 畏^{鈭� 1}} d 蝇]}^{\frac{1}{1 鈭� 畏^{鈭� 1}}}, 畏 > 1

where $U$ is a concave and homothetic function. $伪$ denotes the disutility of labor. $未_{t}$ is a definition function, which takes value unity when employed and zero when unemployed.

The public debt accrues units of cash at gross rate, which is about at the govt discretion. Accordingly every individual wishes to avoid wasting his or her income in terms of the general public debt because there's no uncertainty.