Topic 10 - Fiscal Policy

Topic 10 - Fiscal Policy - Fiscal Policy Government...

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Fiscal Policy Government Purchases, Deficit, Debt, Social Security
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The deficit for fiscal year 2009, which ended Sept. 30, came in at a record $1.42 trillion. In addition, future deficits are currently projected to total $9.1 trillion in the coming decade.
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Moody’s Says U.S. Debt Could Test Triple- A Rating. New York Times, March 15, 2010 “That sobering assessment, issued Monday by Moody’s Investors Service, provided a reminder that even AAA-rated United States Treasury bonds, supposedly the safest of safe investments, could be downgraded one day if Washington failed to manage the federal debt.” http://www.usdebtclock.org/
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Fiscal Policy Government Spending Purchases of Goods and Services Transfer Payments Social Security, SSI Medicare, Medicaid Government Revenues Distortionary Effects of Taxation
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Facts Size of government Spending Tax revenues Budget deficit Debt
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Interest Total Government Expenditure Transfer Government Purchases
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Table 15.1 Government spending in Eighteen OECD Countries, Percentage of GDP, 2005
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Corporate Total Taxes Personal Social Insurance Production
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Budget Deficits Government outlays (spending): Government purchases ( G ) Transfer payments ( TR ), and Net interest payments ( INT )
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The budget deficit is then defined as: deficit = outlays - tax revenues Deficit = ( G + TR + INT ) - T Primary deficit excludes net interest from government outlays = ( G + TR ) - T
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Deficit Primary Deficit
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Figure 15.6 Ratio of Federal debt to GDP, 1939-2005
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Debt The accumulated budget deficit is the national debt. Deficit is a flow, debt is a stock From the 1980s until recently, federal government spending far outstripped revenue, causing the debt to increase considerably. Does it matter?
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Debt Dynamics of debt Debt t+1 – Debt t = Deficit t Debt t+1 – Debt t = Primary Deficit t + i t Debt t where i t = nominal interest rate Deficits add to the government’s debt Debt is constant if, and only if, Primary Surplus t = i t Debt t
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How Indebted Are the World’s Governments? Country Debt to GDP ratio in 1998 Belgium 125% Italy 123 Greece 103 Canada 94 Japan 93 Sweden 76 Spain 74 Netherlands 73 Austria 73 Ireland 67 Denmark 67 Germany 66 Portugal 65 France 65 United States 65 United Kingdom 60 Source: Mankiw 2000
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Macroeconomic Effects of Fiscal Policy Government Purchases of Goods and Services Transfer Payments Taxation Debt Management
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A Change in G Assume that the increase in G is financed by additional lump-sum taxes Therefore, there will be no impact on individual behavior from lump-sum taxation and no impact on government debt Just the increase in G
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What kind of G? Infrastructure expenditures such as those to rebuild
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Topic 10 - Fiscal Policy - Fiscal Policy Government...

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