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Unformatted text preview: Lecture 15: The budget deficit Econ 102, Winter 2012 3/6/2012 1 Required reading : Ch. 13: pp. 351 354 pp. 363 375 (may skip cyclical adjustment pp. 364-365) Outline 1. Spending and taxing numbers 2. The budget balance: deficits and surpluses 3. Countercyclical policy and the budget deficit 4. Deficits v debts 5. The benefits and costs of debt 3/6/2012 2 Consequences of spending The discussion of spending and taxing in the last class went on as if they had no connection You can spend or tax more or less, and the only difference to the policymaker lies in the relevant multiplier Of course, spending goes somewhere. Who, broadly, are the recipients of spending (and transfers)? Who and how are we taxing? 3/6/2012 3 Consequences of spending Tax revenue sources Spending recipients 4 TR G 3/6/2012 Consequences of spending Note that G+TR was bigger than T in the last slide The elements of TR (Medicare, Social Security) are often called entitlement programs. The textbook also calls them implicit liabilities in the sense that we are promises made today to spend in the future Do we in the US spend and tax a lot? Compared to other wealthy countries, no: as a % of GDP, we spend less than almost everyone else Of course, our economy is the largest in the world 3/6/2012 5 Consequences of spending 3/6/2012 6 The budget balance The discussion of spending and taxing in the last class went on as if they had no connection The are, in fact, linked in an important way: the budget surplus (called government savings in Ch. 10) In a world with no income tax, the budget surplus equals: Sg = T - G TR In a world with an income tax: Sg = tY + T - G - TR A negative surplus is called a budget deficit : the government must borrow to fund spending 3/6/2012 7 The budget balance Sg = tY + T - G TR What happens to the budget surplus when discretionary expansionary policy is undertaken? Increase G and/or TR, decrease t and/or T. Sg falls When discretionary contractionary policy is undertaken? Decrease G and/or TR, increase t and/or T....
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This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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