1. Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater or smaller?
A higher growth rate of real GDP
A higher growth rate of real GDP implies that tax revenue will increase. If government spending remains constant and the government runs a budget surplus, the size of the public debt will be less than it would otherwise have been.
Retirees live longer
If retirees live longer, the average age of the population increases. As a result, the implicit liabilities of the government increase because spending on programs for older Americans, such as Social Security and Medicare, will rise.
A decrease in tax revenue
A decrease in tax revenue without offsetting reductions in government spending will cause the public debt to increase.
Government borrowing to pay interest on its current public debt
Public debt will increase as a result of government borrowing to pay interest on its current public debt.