announcement The fed then has an incentive to raise inflation because it faces a favorable tradeoff between inflatior employment em with situations in which time inconsistency arises is that people led to distrust policy announcements.Then students do not study for their exams terrorists kidnap hostages,and the Fed faces an unfavorable tradeoff.In these situation a rule that commits the policymaker to a particular policy can sometimes help the policymaker achieve his or her study.terrorists do not take hostages remains low 8.Do you believe the traditional or the Ricardian view of government debt?Why? Which view of gove mment debt you hold depends on how you think consumers ad ers tiing Yo miaht beleve tho ditional view,ther you believe that t a debt-f nced ta several reasons.First consumers may be shortsighted or irrational so that they think their permanent income has increased even though it has not.Second,consumers may face binding borrowing constraints,so that they are only able to consume their current come.Third.c rs may expect that the implied ta liability w will fall on futu 149generations,a nd these co onsumers may not care enough a about th irchildren to lea them a bequest to offset this tax liability.If you hold the Ricardian view then you believe that the preceding objections are not important.In particular,you believe that consumers have the foresight to see that government borrowing today implies future taxes to be levied on them or their descendants Hence.a debt-financed tax cut gives ransitory income that eventual ly will be taken back.As are sumers will save the extra income they receive in order to offset that future tax liability 9.The cyclically adjusted budget deficit is the budget deficit corrected for the effects of the business cycle.In other words,it is the budget deficit that the would be running if u ent were at the natural rate.(It is ako called the full-employment budget deficit.)Some cconomists bave proposed the rule that the cyclically adjusted budget deficit always be balanced.Compare this proposal to a strict balanced-budget rule.Which is preferable?What problems do you see with the rule requiring a balanced cyelically adjusted budget? 9.A rule requiring a cyclically adjusted balanced budget has the potential to overcome. at least partially,the first two objections to a balanced-budget rule that were raised in this chapter.First,this rule allows the government to run countercyclical fiscal policy in order to stabilize the economy.That is,the govemment can run deficits durins rec ons,when taxe fall Second,this rule allows the government to smooth tax rates across years whenincome is especially low or high-it is not necessary to raise tax rates in recessions or to cut them in booms announcement.The Fed then has an incentive to raise inflation because it faces a favorable tradeoff between inflation and unemployment. The problem with situations in which time inconsistency arises is that people led to distrust policy announcements.Then students do not study for their exams terrorists kidnap hostages,and the Fed faces an unfavorable tradeoff. In these situation a rule that commits the policymaker to a particular policy can sometimes help the policymaker achieve his or her goals—students study,terrorists do not take hostages. inflation remains low. 8.Do you believe the traditional or the Ricardian view of government debt?Why? 8.Which view of government debt you hold depends on how you think consumers behave. If you hold the traditional view,then you believe that a debt-financed tax cut stimulates consumer spending and lowers national saving.You might believe this for several reasons.First,consumers may be shortsighted or irrational,so that they think their permanent income has increased even though it has not.Second,consumers may face binding borrowing constraints,so that they are only able to consume their current income.Third,consumers may expect that the implied tax liability will fall on future 149generations,and these consumers may not care enough about their children to leav them a bequest to offset this tax liability. If you hold the Ricardian view,then you believe that the preceding objections are not important.In particular,you believe that consumers have the foresight to see that government borrowing today implies future taxes to be levied on them or their descendants.Hence,a debt-financed tax cut gives consumers transitory income that eventual ly will be taken back.As a result,consumers will save the extra income they receive in order to offset that future tax liability. 9.The cyclically adjusted budget deficit is the budget deficit corrected for the effects of the business cycle. In other words,it is the budget deficit that the government would be running if unemployment were at the natural rate.(It is also called the full-employment budget deficit.)Some economists have proposed the rule that the cyclically adjusted budget deficit always be balanced.Compare this proposal to a strict balanced-budget rule.Which is preferable?What problems do you see with the rule requiring a balanced cyclically adjusted budget? 9.A rule requiring a cyclically adjusted balanced budget has the potential to overcome, at least partially,the first two objections to a balanced-budget rule that were raised in this chapter.First,this rule allows the government to run countercyclical fiscal policy in order to stabilize the economy.That is,the government can run deficits during recessions,when taxes automatically fall and expenditures automatically rise. These automatic stabilizers affect the deficit but not the cyclically adjusted deficit. Second,this rule allows the government to smooth tax rates across years whenincome is especially low or high—it is not necessary to raise tax rates in recessions or to cut them in booms