CH14_ECON2301 - Macroeconomics ECON 2301 Spring 2009...

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Macroeconomics ECON 2301 Spring 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 14
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Chapter 14: Deficit Spending and the Public Debt
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14-3 Learning Objectives: Explain how federal government budget deficits occur Define the public debt and understand alternative measures of the public debt Evaluate circumstances under which the public debt could be a burden to future generations Discuss why the federal budget deficit might be measured incorrectly Analyze the macroeconomic effects of government budget deficits Describe possible ways to reduce the government budget deficit
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14-4 Public Deficits and Debts: Flows versus Stocks Government Budget Deficit Exists if the government spends more than it receives in taxes during a given period of time Is financed by the selling of government securities (bonds)
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14-5 Public Deficits and Debts: Flows versus Stocks (cont'd) The federal deficit is a flow variable, one defined for a specific period of time, usually one year. If spending equals receipts, the budget is balanced. If receipts exceed spending, the government is running a budget surplus.
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14-6 Public Deficits and Debts: Flows versus Stocks (cont'd) Balanced Budget A situation in which the government’s spending is exactly equal to the total taxes and revenues it collects during a given period of time Government Budget Surplus An excess of government revenues over government spending during a given period of time
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14-7 Public Deficits and Debts: Flows versus Stocks (cont'd) Public Debt A stock variable The total value of all outstanding government securities
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14-8 Government Finance: Spending More than Tax Collections Since 1940, the U.S. federal government has operated with a budget surplus in 13 years. In all other years, the shortfall of tax revenues below expenditures has been financed with borrowing.
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14-9 Figure 14-1 Federal Budget Deficits and Surpluses Since 1940
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14-10 Figure 14-2 The Federal Budget Deficit Expressed as a Percentage of GDP
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14-11 Policy Example: Explaining a $109 Billion Deficit Projection Turnaround Why was the government’s 2005 deficit projection off by $109 billion? Federal tax revenues turned out to be more than 15% higher in 2005. Economic growth caused taxable incomes, hence revenues, to be much higher than anticipated.
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14-12 Evaluating the Rising Public Debt Gross Public Debt All federal government debt irrespective of who owns it Net Public Debt Gross public debt minus all government interagency borrowing
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Evaluating the Rising Public Debt (cont'd) Some government bonds are held by government agencies. In this case, the funds are owed from one branch of the federal government to another. To arrive at the net public debt, we subtract
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This note was uploaded on 03/27/2012 for the course ECON 2301 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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CH14_ECON2301 - Macroeconomics ECON 2301 Spring 2009...

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