Deficit Spending

STUDY
PLAY
Government Budget Deficit exists if
the government spends more than it receives in taxes during a given period of time
Government Budget Deficit is financed by
the selling of government securities (bonds)
Bonds are actually
IOU's in this case the government owes the lender
The federal deficit is
a flow variable
A flow variable is
one defined for a specific period of time, usually one year
Of spending equals receipts
the budget is balanced
If receipts exceed spending
the government is running a budget surplus
Balanced Budget
A situation in which the government's spending is exactly equal to the total taxes and other 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
Public Debt
A stock variable measured at a point in time
The total value of all outstanding federal government securities (bonds)
Gross Public Debt
all federal government debt irrespective of who owns it
Net Public Debt
Gross public debt minus all government interagency borrowing
To arrive at the net public debt, we
subtract interagency borrowings from the gross public debt
Public Debt is a problem because..
1. the government must pay interest on the public debt outstanding
2. the level of these payments depends on the market interest rate
3. Interest payments as a percentage of GDP are likely to rise in the future
4. As more of the public debt is held by foreigners, the amount of interest to be paid outside of the US increases
5. Foreign residents, businesses and governments hold nearly 50% of the net public debt
6. Deficit spending may raise interest rates, which in turn will discourage capital formation in the private sector
In the long run, higher government budget deficits
have no effect on equilibrium real GDP per year
Entitlements
guaranteed benefits under a government program such as Social Security, Medicare, or Medicaid
Noncontrollable Expenditures
Government spending that changes automatically without action by Congress
The largest component of the US federal budget is
entitlements
YOU MIGHT ALSO LIKE...