Module 9

Explain the difference between a federal budget deficit and the national debt.

A deficit is the amount by which the federal government's expenditures exceed its revenues in a given year the national debt is the cumulative total of all past budget deficits minus all past surpluses. It is the amount owed to lenders by the federal government at any point in time making it a stock variable.

Explain the pros and cons of having a large national debt.

Debt can improve the standard of living in a country by allowing the government to build new roads, improve education and job training and provide pensions. Over time, these benefits more than pay for the interest accrued. Budget deficits are critical to help make up for lower investment and private spending during an economic recession. Too much government borrowing can cause economic problems by driving interest rates up and causing inflation. It is also unwise to run a large deficit to finance spending that is unlikely to cause higher future economic growth. When the national debt-to-GDP ratio reaches a critical level, investors generally begin to demand higher interest rates due to the higher risk, causing more income to go toward repaying the debt and less toward growth and government services.

How are deficits financed?

Government financing the budget deficit: That is if government spending (G) exceeds taxes revenues (T), then there is a deficit which can be financed by issuing government bonds (by borrowing money).

Explain the pros and cons of federal budget deficits.

The main disadvantage of the budget deficit is that the government must pay interest on loans. The main advantage of the budget deficit is that the government can carry out large projects that help its citizens.