26+Fiscal+Policy+and+the+Government+Budget

26+Fiscal+Policy+and+the+Government+Budget - Agenda 1. The...

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1 26-1 Fiscal Policy and the Government Budget 26-2 Agenda 1. The Government Budget and Debt 2. Fiscal Policy in the Long-Run and Short-Run 3. Budget Deficits and Inflation 4. Budget Deficits and Ricardian Equivalence 26-3 The Government Budget The government budget consists of: 1. Outlays or government spending, and 2. Receipts or tax revenues. 26-4 The Government Budget Major components of government spending: 1. Government purchases, G, which consists of: Government consumption, G C , and Government investment, G I . 2. Transfer payments, TRANSFERS. 3. Grants-in-aid to state and local governments. 4. Net Interest Payments, INTEREST.
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2 26-5 The Government Budget Major components of receipts (TAXES): 1. Personal taxes, 2. Contributions for social insurance, 3. Taxes on production and imports, 4. Corporate taxes, and 5. Grants-in-aid to state and local governments. 26-6 The Government Budget 26-7 The Government Budget 26-8 The Government Budget The government budget deficit is given by: ¾ Deficit = outlays – receipts ¾ Deficit = (G + TRANSFERS + INTEREST) – TAXES
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3 26-9 The Government Budget Government outlays must be financed by: 1. Tax revenues, 2. Borrowing from the public, and/or 3. Changes in the money supply. 26-10 The Government Budget The government budget constraint is: Deficit = 1. The change in the amount of debt held by the public ( Δ B), PLUS 2. The change in the money supply ( Δ M). Deficit = Δ B + Δ M 26-11 The Government Budget Most governments run budget deficits so the global government debt outstanding has grown over time. Whether or not government debt has been growing more or less rapidly than economic activity can be seen in the debt-to-GDP ratio. 26-12 The Government Budget The U.S. government finances its budget deficits primarily by borrowing from the public. So the correlation between budget deficits and the debt-to-GDP ratio is high. Because of recent large budget deficits the debt- to-GDP ratio has been high and is rising.
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4 26-13 The Government Budget 26-14 The Government Budget 26-15 The Government Budget 26-16 Fiscal Policy in the Long-Run In the long-run, the economic impact of current budget deficits is whether or not they constitute on burden on future generations .
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5 26-17 Fiscal Policy in the Long-Run Government debt is NOT a burden if: 1. The spending was for government investment activities that increased the nation’s
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This note was uploaded on 03/13/2012 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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26+Fiscal+Policy+and+the+Government+Budget - Agenda 1. The...

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