Chapter 12: Deficits and Debt

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Deficit Ceiling

An explicit legislated limitation on the size of the budget deficit.

Debt Ceiling

An explicit, legislated limit on the amount of outstanding national debt.

External Debt

US government debt held by foreign households and institutions.

Crowding In

An increase in private sector borrowing(and spending) caused by decreased government spending.

Liability

An obligation to make future payment.

Crowding Out

A reduction in private sector borrowing(and spending) caused by increased government borrowing.

Budget Surplus

An excess of government revenues over government expenditures.

National Debt

Accumulated Debt of the federal government.

Asset

Anything having exchange value in the marketplace.

Internal Debt

US government debt held by US households and institutions.

NOTE

The risk of crowding out is greater the closer the economy is to full employment.

Cyclical Deficit Shrinks

Effect on cyclical deficit when GDP growth accelerates or inflation decreases.

Cyclical Deficit Widens

Effect on cyclical deficit when GDP growth slows or inflation increases.

Structural Deficit

Federal Revenues at full employment minus expenditures at full employment under prevailing fiscal policy.

Automatic Stabilizer

Federal expenditure or revenue item that automatically responds countercyclically to change in national income, such as: National Income Unemployment Benefits Income Taxes

External Financing

Financing which allows us to get more public sector goods without cutting back on private sector production(or vice versa)

NOTE

Interest payments themselves have almost no direct opportunity cost for the economy

Keynes view of debt and deficits

Macro policy i not to balance the budget but to balance the economy at full employment.

Fiscal Stimulus

Measured by an increase in the structural deficit.

Income Transfers

Payments to individuals for which no current goods or services are exchanged, such as: Social Security Welfare Unemployment Benefits

Treasury Bonds

Promissory notes issued by the US Treasury.

Four potential uses for a budget surplus

Spend it on goods and services Cut taxes Increase income Transfers Pay off old debt

Fiscal Stimulus

Tax cuts or spending hikes intended to increase(shift) aggregate demand.

Fiscal Restraint

Tax hikes or spending cuts intended to reduce(shift) aggregate demand.

Cyclical Deficit

That portion of the budget balance attributable to short-run changes in economic conditions.

Fiscal Year(FY)

The 12-month period used for accounting purposes; begins Oct. 1st for the federal government.

Budget Deficit

The amount by which government spending exceeds government revenue on a given time period.

Debt Service

The interest required to be paid each year on outstanding debt.

Refinancing

The issuance of new debt in payment of debt issued earlier.

Optimal Mix of output

The most desirable combination of output attainable with existing resources, technology, and social values.

Opportunity Cost

The most desired goods or services that are forgone in order to obtain something else.

NOTE

The only way to stop the growth of national debt is to eliminate the budget deficits that create debt.

Deficit Spending

The use of borrowed funds to finance government expenditures that exceed tax revenue.

Fiscal Policy

The use of government taxes and spending yo alter economic outcomes.

Discretionary Fiscal Spending

Those elements of federal budget not determined by pasty legislative or executive commitments.

"Budget Deficit" Formula

__________________ = Government spending - tax revenues > 0

"Total Balance Budget" Formula

____________________ = Cyclical Balance + Structural Balance

Fiscal Restraint

measured by a decrease in the structural deficit.


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