Econ-205 Chapter 15

Econ-205 Chapter 15 - Chapter 15 – Budget Deficits in the...

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Chapter 15 – Budget Deficits in the Short and Long Run Terms The budget deficit is the amount by which the government’s expenditures exceed its receipts during a specified period of time, usually a year. If receipts exceed expenditures, it is called a budget surplus instead. The national debt is the federal government’s total indebtedness at a moment in time. It is the result of previous budget deficits. Crowding out occurs when deficit spending by the government forces private investment to contract. Crowding in occurs when government spending, by raising real GDP, induces increases in private investment spending. Concepts The monetary and fiscal choices the government makes today also have profound effects on our economy’s ability to produce more goods and services in the future. The desirability of budget deficits when private demand, C+I+(X-IM), is too weak and of budget surpluses when private demand is too strong. Budget balancing also can lead to inappropriate fiscal policy under boon conditions. Attempts to balance the budget during recessions – as was done, say, during the Great Depression – will prolong and deepen slumps. The appropriate fiscal policy depends, among other things, on the current stance of monetary policy. Although a balanced budget many be appropriate under one monetary policy, a deficit or a surplus may be appropriate under another monetary policy. The tightening of monetary policy changes the appropriate fiscal policy from a balanced budget to a deficit, because both monetary and fiscal policies affect aggregate demand. By the same token, a given target for aggregate demand implies that any changes in fiscal
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Econ-205 Chapter 15 - Chapter 15 – Budget Deficits in the...

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