CH16 - Government Debt and Deficits Flashcards
What relationship is summarized in the government’s budget constraints
Relationship between gov. expenditures, tax revenues, and borrowing
What is the government’s budget constraint equation?
Gov. Expenditure = Tax revenue + Borrowing
What are the 2 categories of government expenditure?
- Purchase of goods and services (G)
- Debt-service payments (D * i)
What are debt-service payments?
Payments that represent the interest owed on a current stock of debt
What is the 3rd component of gov. expenditure, and why is not directly included in it?
Transfers, because they are included in the net tax revenue (T)
What is a budget deficit?
Any shortfall of revenue below current expenditure
(gov exp. > Tax revenue)
What is the government debt?
The outstanding stock of financial liabilities for the government
It’s equal to the sum of past budget deficits
What is the budget deficit equation?
∆D = (G + i * D) - T
A budget deficit ________ the stock of government debt.
a) increases
b) decreases
c) does not change
increases
What is the primary budget deficit?
The difference between the government’s overall budget deficit and its debt-service payments
i.e. Gov purchases - Net tax revenue
What is the primary budget deficit equation?
PBD = G - T
What does the primary budget deficit/surplus show?
The extent to which current tax revenues can cover the government’s current program spending
What is it important to consider when examining the size and effects of budget deficits/surpluses?
All level of government
What is fiscal policy?
The use of government spending and tax policies
What is the budget deficit function?
A relationship that plots the government’s budget deficit as a function of the level of real GDP (for a given fiscal policy)
What is the relationship between real GDP and the government’s budget deficit?
Negative
What type of change to the budget deficit function does a change in real GDP in the absence of any policy do?
A movement along the budget deficit line
What type of change to the budget deficit function does a fiscal policy do?
A shift of the budget deficit line
Contractionary = shift down
Expansionary = shift up
The actual budget deficit is the sum of what 2 compontents?
Structural and cyclical deficits
What is the structural budget deficit?
An estimate of what the government budget deficit would be if real GDP = Y*
(also called cyclically adjusted deficit)
What is the cyclical deficit when GDP = Y*
0
During recessionary gap, the actual budget deficit _______ the structural budget deficit
The cyclical component is ______
exceeds
positive
Changes in the stance of fiscal policy are best identified by the resulting change in what?
The structural budget deficit
What are the 2 forces that tend to increase the debt-to-GDP ratio?
- If real interest rate (r) exceeds growth rate of real GDP (g), the debt accumulates faster than GDP grows, so debt-to-GDP will increase
- If gov. has a primary budget deficit, it is incurring new debt to finance its program, so debt-to-GDP will increase
In our macro model, we assume that an increase in the government’s budget deficit leads to a ________ in national savings
decrease
(borrowing reduces the government’s saving)
What is crowding out?
The offsetting reduction in private expenditure caused by the rise in the interest rates that follows an expansionary policy
The long run effect of a fiscal expansion is to:
_______ national savings
_______ the real interest rate
_______ private investment
reduce
increase
crowd out
In an open economy, the government budget deficit attracts ___________ and _________ the domestic currency.
The long-run result is a ____________ of net exports
foreign financial capital
appreciates
crowding out
The larger is the increase in potential output caused by a fiscal expansion, the _____ private expenditure will be crowded out
less
What are the 2 categories of capital budgeting?
- Consumption (for current generation)
- Investment (for future generation)
Government budget deficits are paid by who?
By future generations (by paying taxes)
Fears of future debt monetization will likely lead to
expectations of _________ and put ________
pressure on nominal interest rates and on some prices
and wages
Future inflation
upward
Having fiscal expansions during recessions and fiscal
contractions during booms is _________.
counter-cyclical fiscal
policy
What would be the 2 consequences of an annually balanced budget?
- It would eliminate the
automatic fiscal stabilizers - It would accentuate the swings in real GDP
