Chapter 14, Problem 1DQ

To determine

The implications, if the spending exceeds the total revenue, which will be earned from implementation of tax in the future. The change in people’s behavior corresponding to these implications.

Concept introduction:

Budget balance:

The amount by which the government spending differs from the amount of total revenue collected from taxes is referred as budget balance. It is considered to be a deficit, if the expenditure exceeds the revenue collected from tax. It is a surplus, if the revenue exceeds expenditure and it is balanced if both are equal.

Debt: Debt is the borrowed amount that is used to finance the requirements of a company or a person. Terms of the debt are based on the agreement between the two parties where a borrower is bound to return the amount within a fixed time at some interest rates.

Explanation:

• If the government wants to spend more than the revenue it will collected from taxes, then it depends on the borrowing that is debt.

• The debt is to be repaid within a fixed time along with interests. In order to repay the debt, the government has two options. It imposes a higher tax on the public to compensate the excess spending.

• It can also borrow to repay the debt and delay the tax imposition. But this is not a permanent solution, as it would be paid again by increasing the tax rates by a huge amount in the future.

• The people should behave in a way, such that they can maintain their permanent consumption level. The prediction of higher tax will compel them to save more and spend less in the current time, such that the disposable income remains the same in the future.

Explanation of Solution

• If the government wants to spend more than the revenue it will collected from taxes, then it depends on the borrowing that is debt.

• The debt is to be repaid within a fixed time along with interests. In order to repay the debt, the government has two options. It imposes a higher tax on the public to compensate the excess spending.

• It can also borrow to repay the debt and delay the tax imposition. But this is not a permanent solution, as it would be paid again by increasing the tax rates by a huge amount in the future.

• The people should behave in a way, such that they can maintain their permanent consumption level. The prediction of higher tax will compel them to save more and spend less in the current time, such that the disposable income remains the same in the future.

Economics Concept Introduction

Concept introduction:

Budget balance:

The amount by which the government spending differs from the amount of total revenue collected from taxes is referred as budget balance. It is considered to be a deficit, if the expenditure exceeds the revenue collected from tax. It is a surplus, if the revenue exceeds expenditure and it is balanced if both are equal.

Debt: Debt is the borrowed amount that is used to finance the requirements of a company or a person. Terms of the debt are based on the agreement between the two parties where a borrower is bound to return the amount within a fixed time at some interest rates.