Principles of Economics- Mankiw (5th) 775

Principles of Economics- Mankiw (5th) 775 - CHAPTER 34 F I...

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CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 801 government spending on to future taxpayers. Inheriting such a large debt cannot help but lower the living standard of future generations. In addition to this direct effect, budget deficits also have various macroeco- nomic effects. Because budget deficits represent negative public saving, they lower national saving (the sum of private and public saving). Reduced national saving causes real interest rates to rise and investment to fall. Reduced investment leads over time to a smaller stock of capital. A lower capital stock reduces labor produc- tivity, real wages, and the economy’s production of goods and services. Thus, when the government increases its debt, future generations are born into an econ- omy with lower incomes as well as higher taxes. There are, nevertheless, situations in which running a budget deficit is justifi- able. Throughout history, the most common cause of increased government debt is war. When a military conflict raises government spending temporarily, it is rea-
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