Question

Write the government deficit as a function of the nominal interest rate.

Answer 1

further room to reduce effects than that government debt itself has wealth effects for currently alive households that pure lump sum teix policy aimed at increasing the outstunding stock of ad hoc series ot fiscal and monetary mewures- deficit financed government spending increwer, tux coets, and unconventional monetary policy measures such as open market purchases on -tong-dated securities direct increase in the monetary base et. monetary and fiscal policy could be webully employed even when short term nomina interest rate. go rerniment different cuts may be expansionary and moreover that monetary aggregates effect inclepondienty of its effect on nominal interest spending financed by debt has the financed by tax increauer, --- moretary may have direct ideau bouanco, rates. -- government debt and constrained by the zero bound on the zero bound on nomina interest rates. Given that the liquidity trap is generated deficit in an economy CS Scanned with CamScanner

the by a large increase in the desire to save on past of the private private sector the wealth ebbeets oo a government deficit can poovide a critical mare conanic response to this. crovernment spending financed by deficits may be far more expansion ary than that financed by tax increase in such an enviornment, In a liquidity trap tax cuts may be much more effective than during normal times finally monetary policies aimed at directly increasing monetary aggregates be effective, even if intrests rater are unchanged. when you nee monetary accomdation of the deficit the government need to create an incentives the private sector byy more government bonde. Its the private sectors purchase of government bonde does not increaue one-for-one with the higher deficit the government borrow more money. The renteral baut directly purchase the securities issued by the governmen to finance tei deficits, federal resoome respond to higher cleficits by increasing growth of money. for mut CS Scanned with CamScanner