Chapter 31 Book Flashcards
Expenditure
The total amount of money a government person or organization spends during a certain period of time
If the economy is operating below its potential output in the short run
Deficits are good and surpluses are bad because deficits increase ex expenditures moving output closer to potential
Deficit
A shortfall of revenues under payments
Surplus
An excess of revenues over payments
Deficit and surplus are both flow concepts: true or false ?
True
A government budget deficit occurs when ?
When expenditures exceed revenues
Fiscal austerity
Increases no taxes and decreasing spending
Structural deficit
The part of a budget deficit that would exist even if the economy were at its potential level of income
Cyclical deficit
The part of the deficit that exists because the economy is operating below its potential output
Actual deficit
Actual = structural deficit + cyclical deficit
Structural deficit
The part of a budget deficit that would exist even if the economy were at its potential level of income
Cyclical deficit
The part of the deficit that exists because the economy is operating below its potential level of output
Another name for cyclical deficit ?
Passive deficit
Cyclical deficit =
Tax rate • (potential output - actual output)
Structural deficit =
Structural deficit = actual deficit - cyclical deficit
Real deficit =
Nominal deficit - (inflation x total debt)
Difference between debt and deficit
Debt is deficits added together
Debt is a stock concept (measured at one point in time)
Deficit is a flow concept (measured over a period of time)
Internal debt
Debt owed to US citizens or other govt agencies
• dosnt effect wealth of citizens because taxes and interest even out
External debt
Government debt owed to individuals in foreign countries
• makes US citizens poorer because net reduction in domestic income and makes foreign holders of US bonds richer
Q-1 why might a policy of fiscal austerity have difficulty lowering the debt to GDP ratio?
A policy of austerity may throw an economy into a recession, lowering both government revenue and GDP. Both these would tend to increase the debt to GDP ratio.
How does the U.S. government finance its deficit spending?
It sells bonds to private individuals and the central bank
Structural deficit remains when
Cyclical elements have been removed
Real - cyclical = structural
Q -4 explain how inflation can wipe out debt?
Inflation reduces the value of money with which debt will be repaid and in real terms wipes out a percentage of the debt
Real deficit =
Nominal deficit - (inflation • total debt)
The nominal deficit is 40 billion inflation is 2 % and total debt is 4 trillion what is real deficit ?
- 40 billion it’s actually a surplus
Q-6 why is inflation not a cost less way for government to lower the real debt ?
Inflation can push up interest
