Chapter 16 Flashcards
What is the government’s budget constraint?
Government expenditures must be financed by income or by borrowing.
What is the government budget constraint equation?
Government expenditure = Tax Revenue + Borrowing
What are the 2 categories of government expenditure?
- Purchases of goods and services, G
- Interest payments on the outstanding stock of debt, which is referred to as debt-service payments, and is denoted as i ×D
What is the borrowing equation?
(G + i × D) – T = Borrowing
What does G represent?
Government spending on Goods and Services
What does i x D represent?
Interest payments on outstanding debt
The government’s annual budget deficit is the what?
Excess of government expenditure over tax revenues in a given year.
The annual deficit is the ___ as the amount borrowed by the government during the year.
same
Borrowing by the government increases the what?
stock of government debt.
What is the budget deficit equation?
Budget Deficit = ΔD = (G + i x D) − T
The primary budget deficit is the ___ between the government’s overall budget deficit and its debt-service payments.
difference
What is the primary budget deficit equation?
Primary budget deficit = G - T
The primary budget surplus or deficit shows what?
The extent to which current tax revenues can cover the government’s current program spending.
What is fiscal policy?
It is the use of government spending and
tax policies.
For a given set of expenditure and taxation policies, the budget deficit ___ as real GDP ___, and ___ as real GDP ___.
rises
falls
falls
rises
The budget deficit function is a relationship that what?
Plots the government’s budget deficit as a function of the level of real GDP.
What does fiscal policy determine?
The position of the budget deficit function
Changes in real GDP lead to movements along a what?
Given budget deficit function.
For given government purchases and debt-service payments, there is what kind of relationship?
A negative relationship between real GDP and the government budget deficit.
When real GDP = Y*, there is no ___ component to the budget deficit
cyclical
Whatever deficit then exists is the ___
structural budget deficit
During recessionary gaps (Y < Y*), the actual budget deficit ___ the structural budget deficit.
exceeds
During inflationary gaps (Y > Y*), the actual budget deficit is ___ the structural budget deficit.
less than
Changes in the stance of fiscal policy are best identified by the resulting change in the ___ budget deficit.
structural
What is the equation for the change in the debt-to-GDP ratio?
Δd = x + (r − g) x d
d is the debt-to-GDP ratio
Δd is the change in the debt-to-GDP ratio
x is the government’s primary budget deficit as a percentage of GDP
r is the real interest rate on government bonds
g is the growth rate of real GDP
What are the 2 separate forces that tend to increase the debt-to-GDP ratio?
- If r exceeds g, the debt-to-GDP ratio will rise because the debt accumulates at a faster rate than GDP grows.
- If the government has a primary budget deficit, the debt- to-GDP ratio will rise because the government is incurring new debt to finance its program spending.
If the real interest rate on government debt is approximately equal to the growth rate of real GDP, reductions in the debt-to-GDP ratio require the government to run what?
Primary budget surpluses
What may government budget deficits do?
They may crowd out private-sector activity and may harm future generations by reducing the economy’s long-run growth rate
What is crowding out?
It is the offsetting reduction in private expenditure caused by the rise in interest rates that follows an expansionary fiscal policy.
What may budget surpluses do?
They may crowd in private-sector activity and be beneficial to future generations by increasing the economy’s long-run growth rate
What is an increased budget deficit assumed to cause in the supply of national saving?
It is assumed to decrease the supply of national saving
What does a decrease of national saving do to the equilibrium real interest rate? To the amount of investment?
It increases the equilibrium real interest rate and decreases the amount of investment
What does a government budget deficit attract in an open economy?
It attracts foreign financial capital and appreciates domestic currency
What is the long-run result of the government budget deficit in an open economy?
Crowding out of net exports
The larger the increase in potential output caused by fiscal expansion the ___ private expenditure will be crowded out
less
An increase in the budget deficit is assumed to cause what kind of reduction?
A reduction in the supply of national saving
What will a reduction in national saving increase?
It will increase the equilibrium real interest rate and reduce the amount of investment in the economy
For a closed economy, the long-run effects of an increase in the budget deficit will be a higher what?
Real interest rate and a reduction in private investment.
In an open economy, the government budget deficit attracts what and appreciates what?
Foreign financial capital
Domestic currency
The larger the increase in potential output caused by fiscal expansion, the ___ private expenditure will be crowded out
less
Government debt generates a redistribution of ___ away from future generations toward the current generations.
Resources
Debt incurred to finance public investment may result in no ___ for future generations
burden
Fears of future debt monetization will likely lead to expectations of future ___ and put upward pressure on ___ rates and on some prices and wages.
inflation
nominal interest rates
In the absence of any current actions by the central
bank, a large government debt may lead to the
expectation of future ___, hampering the task of the central bank in keeping inflation and inflationary expectations low.
inflation
Having fiscal expansions during recessions and fiscal contractions during booms is
counter-cyclical fiscal policy.
A large and rising stock of government debt could “___” of the government in times when it would otherwise want to conduct counter-cyclical fiscal policy.
tie the hands
An annually balanced budget would ____ the
automatic fiscal stabilizers and accentuate the swings in real GDP.
eliminate
Balancing the budget over the course of the business cycle is in principle a desirable means of reconciling short-term ___ with long-term fiscal ___
stabilization
prudence
Most economists view a low and relatively stable debt- to-GDP ratio as the ___ indicator of fiscal prudence.
appropriate
Their view permits a budget deficit such that the stock of debt grows ___ than GDP.
no faster
