Macro15 - Chapter 15: Budget Deficits in the Short and Long...

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Chapter 15: Budget Deficits in the Short and Long Run Should the Budget Be Balanced? The Short Run Balanced budget means more of an instruction to fiscal policy makers to focus on balancing AS and AD . o Desires deficits when private demand (CIGNX) too weak, and surpluses when too strong. .but only during when GDP=Full employment Attempts to balance the budget during recessions—as was done, say, during the Great Depression—will prolong and deepen slumps. . In inflation, it will “boom the boom” o The Importance of the Policy Mix Gov’t affects AD not only through Fiscal but also Monetary The appropriate fiscal policy depends, among other things, on the current stance of monetary policy. Although a balanced budget may be appropriate under one monetary policy, a deficit or a surplus may be appropriate under another monetary policy. Ex) if recessionary gap, gov’t can fix by using a balanced budget and fiscal policy. However if, because of monetary policy AD shifts left, then gov’t has to rasie spending/cut taxes to fix it…opening the budget deficit. Various combinations/mixes of fiscal and monetary policy can lead to the same level of AD Surpluses and Deficits: The Long Run We learned that more expansionary fiscal policy and tighter money leads to higher interest rates and therefore lower Investments. (1980s) And conversely, tighter budgets and loser monetary policy leads to lower real interest rates and more intvestment and faster growth of potential GDP (1990s) The composition of AD is a major determinant of the rate of economic growth. If a larger fraction of GDP is devoted to investment, the nation’s capital stock will grow faster and the AS schedule will shift more quickly to the right, accelerating growth. Deficits and Debts: Terminology and Facts Budget deficit : the amount by which the gov’ts expenditures exceed its receipt during a specified period of time, usually a year. Budget Surplus : if receipts exceed expenditures National Debt : the federal govt’s total indebtedness at a moment in time. IT is the result of previous budget deficits. o Some Facts about the Nat’l Debt Public debt was 28k for each man at end of 2006 Net national debt approximately 4 trillion GDP 13.5 trillion Until about 1983, almost all of the US nat’l debt stemmed from financing wars and from the losses of tax revenues that accompany recessions. Interpreting the Budget Deficit or Surplus
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This note was uploaded on 02/13/2008 for the course ECON 205 taught by Professor Kamrany during the Spring '07 term at USC.

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Macro15 - Chapter 15: Budget Deficits in the Short and Long...

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