Ch.13 Commentary

Ch.13 Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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INSTRUCTOR COMMENTARY Chapter Reference: Chapter 13 Budget Deficits and the National Debt 1. Chapter 13 focuses on the following important concepts: A. The relationship between a budget deficit or surplus and the size of the national debt. A budget deficit is the excess of federal government expenditures over revenues in a given year, and is financed by having the U.S. Treasury sell bonds. The total amount of bonds sold by the U.S. Treasury that have not yet been repurchased determines the value of the national debt. (text, p. 329) B. Principal causes of the growth of the national debt. The national debt has grown most rapidly as a result of tax rate reductions during the 1980s, expenditures for wars (including the cold war) and the operation of the automatic fiscal stabilizers. (text, p.334) C. Who owns the national debt? About 40% of the total national debt today is held by agencies of the federal government. Of the remaining portion—the Public Debt —about 44% is held outside of the United States. This percentage has been increasing rapidly in recent years. (text, p. 340) D. The effects of the national debt on the U.S. economy. We explored a number of possible burdens of the national debt on the American people. First, we noted that the debt is very unlikely to be paid off. As old bonds are turned in (redeemed), new bonds are sold by the Treasury and so the size of the debt is essentially unchanged. However, if the debt were to be paid off, there would be no loss of goods and services to the American people to the extent that the bonds were held inside of the United States. Paying off foreign bond holders would place additional dollars in foreign hands which, if used to purchase U.S. goods and services, could reduce the amount of GDP available to current domestic residents. There could be an interest cost burden associated with the national debt, in that such interest payments represent tax dollars that not used to provide public goods and services to the 1
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American people. The financing of budget deficits causes the U.S. Treasury to compete with business firms for loanable funds. This increased demand for such funds could cause interest rates to rise and private investment expenditures to fall. In such a case, deficit financing could cause “crowding out” that would reduce total investment expenditures (and the rate of economic growth). The existence of the national debt could cause the distribution of income to change because those who pay the taxes to finance the current debt (and new deficits) are not necessarily the households that hold most of the national debt. The opportunity cost of the debt is determined by the change in the composition and total of GDP in economy that results from the existence of the debt. If a current budget deficit causes real GDP to rise, because of substantial unemployed resources in the economy, this opportunity cost could be quite low. Finally, fears of bankruptcy on the part of the federal government as a result of the debt are quite exaggerated. Unlike
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Ch.13 Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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