Budget Analysis and Deficit Financing

Question 1

debt

Answer 1

the amount borrowed by government through bonds from individuals, firms or foreigners. debt is a stock

Question 2

budget balance

Answer 2

government’s revenues minus government’s spending minus interest payments on debt in a given year

Question 3

primary deficit

Answer 3

spending - revenue

Question 4

aus government gross and net debt as % of GDP

Answer 4

34.9%
21.6%

Question 5

government debt sustainability

Answer 5

requires the debt/gdp ratio to be stable or decreasing

Question 6

intergenerational effects of govt debt in a closed economy

Answer 6

govt borrows from private sector
govt debt increase private wealth and decreases public wealth
no effect on national wealth
changes the distribution of wealth

Question 7

intergenerational effects of govt debt in an open economy

Answer 7

govt debt can also be borrowed from abroad
in this case, govt debt is indeed making future generations poorer

Question 8

entitlement spending

Answer 8

mandatory funds for programs for which funding levels are automatically set by the number of eligible recipients (medicare, NDIS, social security)

Question 9

discretionary spending

Answer 9

optional spending set by appropriation levels each year

Question 10

new-keynesian theory

Answer 10

more government spending or tax cuts stimulates the economy in the short-run

Question 11

short run stabilisation

Answer 11

govt can use taxes and spending policies to smooth the peaks and troughs of the business cycle

Question 12

automatic stabilisation

Answer 12

policies that automatically alter taxes or spending in response to economic fluctuations to offset changes in household consumption levels

Question 13

discretionary stabilisation

Answer 13

policy actions taken by the government in response to business cycle

Question 14

static scoring

Answer 14

a method used by budget modelers that assumes that government policy changes only the distribution of toal resources, not the amount of total resources

Question 15

dynamic scoring

Answer 15

a method used by budget modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources

Question 16

intertemporal budget constraint

Answer 16

relates the present discounted value of the government’s obligations to the present discounted value of its revenues:
PDV of Tax Payments = PDV of all future govt spending + current govt debt

Question 17

long run fiscal imbalance

Answer 17

the gap between PDV of all future government spending + current govt debt and PDV of tax payments

Question 18

long run effects of govt debt

Answer 18

with more govt debt, if private savings do not change, less funds available for investment: investment decreases

Question 19

two mitigating factors to long run effects of govt debt

Answer 19

in an open economy, investment or govt debt can be funded with foreign savings

if individuals are forward looking, they understand that higher debt implies high taxes later on and hence they save more to be able to pay higher taxes later on

Question 20

background: savings and economic growth

Answer 20

the earliest economic growth models emphasised a central role for savings as an engine of growht, and this insight remains important for growth economics tofay

Question 21

more capital more growth

Answer 21

as there is more capital in an economy, each worker is more productive and total social product rises. a larger capital stock means more total output for any level of labour supply. thus, the size of the capital stock might be a primary driver of growth

Question 22

interest rate

Answer 22

the rate of return in year t+1 on investments made in year t

Question 23

supply and demand for capital

Answer 23

supply of savings (from households) depends positively on r (higher r means bigger returns to savings)

demand for investment (from firms) depends negatively on r (firms invest only if return on investment is at least equal to r)

in a competitive market, the equilibrium amount of investment is determined by the intersection of these demand and supply curves S(r) = D(r)

Question 24

international capital markets

Answer 24

with intl capital markets, there is a worlwide interest rate so govt debt has no impact on r and K