Chapter5_302

Chapter5_302 - CHAPTER 5 I. Effects of Budget Deficits A....

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CHAPTER 5 I. Effects of Budget Deficits A. Crowding-out of Net Exports 1. Circular Flow Identity: T G = ( I + NX S ) a. budget deficit ( T G ) is financed by in I + NX or S b. Crowding-out: in I crowding-out of planned investment ( economic growth rate) c. Twin Deficits: in NX trade balance (and foreign investment); if the budget deficit is a large percent of GDP is induces a trade deficit as foreign borrowing is needed to finance the domestic budget deficit. 2. Impact on Future a. Future generations face slower wage growth due to crowding-out of I . b. Future generations must pay-off domestic debt (20% of Federal Budget is interest on the national debt) and receive less net international factor income flow as foreign factor service payments increase and foreign factor payment to the U.S. decline. 3. Size of Government and Deficit a. Total government expenditures spike during wars (WWI, WWII, Korean, Vietnam, etc.) b. Government expenditures are only 3-5% of GDP pre-WWII and 20-25% of GDP after WWII—due to growth of social programs (Social Security, Medicare and Medicaid) and nondefense public goods (education, highways and other infrastructure) c. Prior to 1982, federal deficits are linked to the business cycle (macroeconomic stabilization policy after WWII) and in recession and 9 in expansion (states run a balance over time since they do not have A unlimited @ borrowing capacity like the federal govt.). d. After 1982, deficits persist during expansion phases (approx. 5% of GDP in the mid-1980s). e. Between 1992 and 2000, the deficit as percent of GDP declines are becomes a surplus from1997 to 2000.
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2 f. After 2001 recession, persistent deficits return; currently the U.S. budget deficit is approx. 3% of GDP (approx. $400 billion). II. Structural Budget A. Budget Surplus Line: BB = T a + tY - G (i.e., net revenues - govt. purchases). 1. Net tax revenue ( T ) = T a + tY, where T a = autonomous taxes and tY= income taxes and t = average marginal tax rate. 2.
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Chapter5_302 - CHAPTER 5 I. Effects of Budget Deficits A....

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