lectur3-page3 - Well the government does what most folks do...

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We are going to take a look at the federal budget for fiscal year 2005. To put things in perspective, I have also provided the nominal GDP for 2005, at almost $12.5 trillion. Nominal simply means that this GDP figure is not adjusted for inflation, that the GDP is given in current dollars (2005 dollars). I hope you notice the magnitude of government spending relative to the GDP. The government is a rather large player in the economy. In 2005, federal government spending totaled a little over $2.47 trillion. Federal government revenues totaled over $2.15 trillion. Of course, most of the federal revenues came from the collection of taxes. Notice the government spent more money than it brought in, resulting in an annual federal deficit of $318.3 billion. In 1999, the government had an annual federal surplus of $125.6 billion. Where did the government get that $318.3 billion that it did not have in revenues?
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Unformatted text preview: Well, the government does what most folks do when they are a little short, they borrow the money. They borrow money by auctioning U.S Treasury Securities in the form of treasury bonds, notes and bills at a discount from face value. A Treasury bill is a certificate representing a short-term loan to the federal government that matures in three, six or 12 months. A Treasury note matures in two to 10 years. A Treasury bond matures in more than 10 years. A 12 month Treasury bill may have a face value of $10,000, but is auctioned to the highest bidder at discount. For example, the winning bid may be $9,500. The bidder pays $9,500 for the security, and at the end of 12 months the government pays the holder of the bill $10 000 The $500 3 end of 12 months the government pays the holder of the bill $10,000. The $500 difference is the interest paid to the purchaser....
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