Chapter 34 Notes

Chapter 34 Notes - [ChapterThirtyFour] DeficitsandDebt...

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[Chapter Thirty Four] Deficits and Debt Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Define the terms deficit, surplus, and debt. 2. Distinguish between a passive deficit and a structural deficit. 3. Differentiate between real and nominal deficits and surpluses. 4. Explain why the debt needs to be judged relative to assets. 5. Describe the historical record for the U.S. deficit and debt. Chapter Outline Deficits and Debt In the long-run framework, budget surpluses are good because they provide additional saving for an economy and deficits are bad because they reduce saving, growth, and income. In the short-run framework, the view of deficits and surpluses depends on the state of the economy relative to its potential. Combining the two frameworks gives us the following directive: whenever possible, run surpluses to help stimulate long-run growth. In 2000, when the U.S. economy was booming, unemployment was at historic lows; both frameworks recommended building up a surplus; instead, the government increased spending and cut taxes. In 2001, the economy fell into a mild recession. The earlier tax cut played a role in making the recession of 2001 the shortest on record. Defining Deficits and Surpluses
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Deficit: “A shortfall of revenues under payments.” Surplus: “An excess of revenues over payments.” Both deficit and surplus are flow variables. A table gives data on government revenues and expenditures for various years since 1980. Financing the Deficit When the government runs a deficit, it finances it by selling bonds to private individuals and to the central bank. Some developing countries have few people who want to buy their bonds. Countries have an option that households don’t: central banks can loan them money. Arbitrariness of Defining Deficits and Surpluses Whether you have a deficit or surplus depends on what you count as a revenue and what you count as an expenditure. Accounting is central to the debate about whether we should be concerned about a deficit. Example: should a promise to pay be counted as an expense now, or when it is paid? Social Security System: “A social insurance program that provides financial benefits to the elderly and disabled and to their eligible dependents and/or survivors.” Social security is based on promises to pay. Many Right Definitions There are many ways to measure expenditures and receipts, so there are many ways to measure surpluses and deficits. Pretending to have income that you don’t have is wrong by all standards; inconsistent accounting practices are similarly wrong. Deficits and Surpluses as Summary Measures
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Chapter 34 Notes - [ChapterThirtyFour] DeficitsandDebt...

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