Chapter 11.2 Flashcards
The Meaning of Government Debt
What is government debt?
Amount of money that a government owes to lenders outside the government itself
The Meaning of Government Debt
What is the government budget?
Type of plan of a country’s revenues and expenditures over a period of time
The Meaning of Government Debt
How is government revenue generated?
Taxes
The Meaning of Government Debt
What do government expenditures consist of?
-Wages to government employees,
-Provision of merit goods,
-Investments in infrastructure -Transfer payments
The Meaning of Government Debt
When will there be a balanced budget?
When revenues = expenditures
The Meaning of Government Debt
When will there be a budget surplus?
When revenues are greater than expenditures
The Meaning of Government Debt
When will there be a budget deficit?
When revenues are less than expenditures
How Government Debt Arises
How do governments pay for deficit?
By borrowing, which allows governments to continue to spend without having to increase taxes
How Government Debt Arises
What is sustainable debt?
A level of debt where the borrwoing government has enough revenues to meet its obligations while also allowing economic growth to occur at an acceptable rate
How Government Debt Arises
How do governments borrow?
Issue bonds, which are a form of debt
How Government Debt Arises
Why is there an incentive for individuals to buy bonds?
Due to interest rate they receive
How Government Debt Arises
What is a common way to measure the size of a country’s government debt?
Debt-to GDP ratio
Costs of High Levels of Debt
What are the costsof high levels of debt?
-Debt servicing costs
-Poor credit ratings
-Impacts of future taxation and government spending
-Possibility of debt trap
-Increased income inequality
Costs of High Levels of Debt
How do debt servicing costs arise from high levels of debt?
Debt servicing refers to repaying the pricipal plus interest payments, large payments have major opportunity costs. If there were external debts, then the government has to use export spending to pay for debt servicing resulting in less foreign exchange for imports
Costs of High Levels of Debt
How does poor credit rating arise from high levels of debt?
-A credit rating is an assessment of the ability of a borrower to pay back loans. A low credit rating means that a government may have difficulties servicing its debt
Costs of High Levels of Debt
How does debt impact future taxation and government spending?
To achieve budget surpluses the government may either increase taxes, or decrease spending both are politically unfavored. In addition, achieving a surplus may lead real GDP to fall leading to recessionary gap as well as debt-to GDP ratio to increase.
Costs of High Levels of Debt
How may a debt trap be caused by high levels of debt?
A debt trap involves a situation where a country must keep taking out new loans in order to pay back old ones
Costs of High Levels of Debt
Why does the distribution of income become unequal?
When governments pays interest to lenders, it does so by tax revenues. Therefore there is a transfer of income away from lower income taxpayers and towards higher income bond holders
