Economics_Ch14

# Exhibit 14 8 shows projected budget deficits from

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Unformatted text preview: educe the unemployment rate. For many people, it was “better to balance the economy than to balance the budget.” Exhibit 14-8 shows projected budget deficits from 2006 to 2011. One would expect that the people living in the houses on the left are more able to pay taxes than the people who live in the housing shown on the right. Do you think the people living in the more expensive housing should have to pay a higher percentage of their income in taxes? If so, why? budget deficit The situation in which federal government expenditures are greater than federal government tax revenues. budget surplus The situation in which federal government expenditures are less than federal government tax revenues. Section 2 The Budget: Deficits and Debt 383 14 (364-389) EMC Chap 14 EXH I BIT 14-8 11/18/05 10:59 AM Page 384 Projected Federal Budget Deficits, Projected Federal Budget Deficits, 2006 2011 2006–2011 Budget deficit (in billions of dollars) \$400 \$298 \$300 \$268 \$246 \$219 \$201 \$200 \$95 \$100 0 2006 2007 2008 2009 2010 example, if Harry earns \$30,000 a year and spends \$32,000, he would have had to borrow \$2,000. This \$2,000 is Harry’s debt. What is true for Harry is true for the federal government. If it spends more than it receives in tax revenues, it has to borrow the difference and incur a debt. Of course, another way to say this is that every time the federal government runs a deficit, it has to borrow money and incur a debt. In short, deficits lead to debt. The debt of the federal government is called the national debt. As we stated earlier, the national debt as of October 24, 2005, was \$8.009 trillion. If we divide the national debt by the U.S. population, we get per capita national debt, which is approximately \$25,950. The per capita national debt is sometimes referred to as each “citizen’s share” of the national debt. 2011 Year Source: Economic Report of the President, 2005. QUESTION: Will I have to pay off some of the national debt one day? These projections can change from year to year as economic conditions change and as Congress passes new tax laws. ANSWER: Whenever you pay federal taxes, QUESTION: Do all economists think that enacting expansionary fiscal policy (even if it causes a budget deficit) is the way to reduce the unemployment rate? ANSWER: No. Remember what we said in the last chapter. Some economists believe that if the government spends more (enacts expansionary fiscal policy by raising its spending), members of the private sector (you, for example) will spend less. In the case of complete crowding out (a term from the last chapter), \$1 more spent by the government will lead to \$1 less spent by the private sector. This means no additional spending occurs in the economy to push the unemployment rate down. National Debt The only way an individual can spend more than he or she earns is to borrow the difference and incur a debt. (We are ruling out monetary gifts to this person.) For 384 Chapter 14 Taxing and Spending you are helping to pay off the national debt. Remem...
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