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Macroeconomics > Chapter 16 > Flashcards

Chapter 16 Flashcards

1
Q

What is the government’s budget constraint?

A

Government expenditures must be financed by income or by borrowing.

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2
Q

What is the government budget constraint equation?

A

Government expenditure = Tax Revenue + Borrowing

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3
Q

What are the 2 categories of government expenditure?

A
  1. Purchases of goods and services, G
  2. Interest payments on the outstanding stock of debt, which is referred to as debt-service payments, and is denoted as i ×D
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4
Q

What is the borrowing equation?

A

(G + i × D) – T = Borrowing

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5
Q

What does G represent?

A

Government spending on Goods and Services

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6
Q

What does i x D represent?

A

Interest payments on outstanding debt

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7
Q

The government’s annual budget deficit is the what?

A

Excess of government expenditure over tax revenues in a given year.

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8
Q

The annual deficit is the ___ as the amount borrowed by the government during the year.

A

same

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9
Q

Borrowing by the government increases the what?

A

stock of government debt.

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10
Q

What is the budget deficit equation?

A

Budget Deficit = ΔD = (G + i x D) − T

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11
Q

The primary budget deficit is the ___ between the government’s overall budget deficit and its debt-service payments.

A

difference

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12
Q

What is the primary budget deficit equation?

A

Primary budget deficit = G - T

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13
Q

The primary budget surplus or deficit shows what?

A

The extent to which current tax revenues can cover the government’s current program spending.

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14
Q

What is fiscal policy?

A

It is the use of government spending and
tax policies.

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15
Q

For a given set of expenditure and taxation policies, the budget deficit ___ as real GDP ___, and ___ as real GDP ___.

A

rises
falls
falls
rises

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16
Q

The budget deficit function is a relationship that what?

A

Plots the government’s budget deficit as a function of the level of real GDP.

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17
Q

What does fiscal policy determine?

A

The position of the budget deficit function

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18
Q

Changes in real GDP lead to movements along a what?

A

Given budget deficit function.

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19
Q

For given government purchases and debt-service payments, there is what kind of relationship?

A

A negative relationship between real GDP and the government budget deficit.

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20
Q

When real GDP = Y*, there is no ___ component to the budget deficit

A

cyclical

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21
Q

Whatever deficit then exists is the ___

A

structural budget deficit

22
Q

During recessionary gaps (Y < Y*), the actual budget deficit ___ the structural budget deficit.

A

exceeds

23
Q

During inflationary gaps (Y > Y*), the actual budget deficit is ___ the structural budget deficit.

A

less than

24
Q

Changes in the stance of fiscal policy are best identified by the resulting change in the ___ budget deficit.

A

structural

25
Q

What is the equation for the change in the debt-to-GDP ratio?

A

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

26
Q

What are the 2 separate forces that tend to increase the debt-to-GDP ratio?

A
  1. If r exceeds g, the debt-to-GDP ratio will rise because the debt accumulates at a faster rate than GDP grows.
  2. 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.
27
Q

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?

A

Primary budget surpluses

28
Q

What may government budget deficits do?

A

They may crowd out private-sector activity and may harm future generations by reducing the economy’s long-run growth rate

29
Q

What is crowding out?

A

It is the offsetting reduction in private expenditure caused by the rise in interest rates that follows an expansionary fiscal policy.

30
Q

What may budget surpluses do?

A

They may crowd in private-sector activity and be beneficial to future generations by increasing the economy’s long-run growth rate

31
Q

What is an increased budget deficit assumed to cause in the supply of national saving?

A

It is assumed to decrease the supply of national saving

32
Q

What does a decrease of national saving do to the equilibrium real interest rate? To the amount of investment?

A

It increases the equilibrium real interest rate and decreases the amount of investment

33
Q

What does a government budget deficit attract in an open economy?

A

It attracts foreign financial capital and appreciates domestic currency

34
Q

What is the long-run result of the government budget deficit in an open economy?

A

Crowding out of net exports

35
Q

The larger the increase in potential output caused by fiscal expansion the ___ private expenditure will be crowded out

A

less

36
Q

An increase in the budget deficit is assumed to cause what kind of reduction?

A

A reduction in the supply of national saving

37
Q

What will a reduction in national saving increase?

A

It will increase the equilibrium real interest rate and reduce the amount of investment in the economy

38
Q

For a closed economy, the long-run effects of an increase in the budget deficit will be a higher what?

A

Real interest rate and a reduction in private investment.

39
Q

In an open economy, the government budget deficit attracts what and appreciates what?

A

Foreign financial capital
Domestic currency

40
Q

The larger the increase in potential output caused by fiscal expansion, the ___ private expenditure will be crowded out

A

less

41
Q

Government debt generates a redistribution of ___ away from future generations toward the current generations.

A

Resources

42
Q

Debt incurred to finance public investment may result in no ___ for future generations

A

burden

43
Q

Fears of future debt monetization will likely lead to expectations of future ___ and put upward pressure on ___ rates and on some prices and wages.

A

inflation
nominal interest rates

44
Q

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.

A

inflation

45
Q

Having fiscal expansions during recessions and fiscal contractions during booms is

A

counter-cyclical fiscal policy.

46
Q

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.

A

tie the hands

47
Q

An annually balanced budget would ____ the
automatic fiscal stabilizers and accentuate the swings in real GDP.

A

eliminate

48
Q

Balancing the budget over the course of the business cycle is in principle a desirable means of reconciling short-term ___ with long-term fiscal ___

A

stabilization
prudence

49
Q

Most economists view a low and relatively stable debt- to-GDP ratio as the ___ indicator of fiscal prudence.

A

appropriate

50
Q

Their view permits a budget deficit such that the stock of debt grows ___ than GDP.

A

no faster

Macroeconomics (14 decks)

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