Chp.14 Deficit spending and the Public Debt

In 20192019​, government spending is ​$2.6trillion, and taxes collected are ​$1.9trillion. What is the federal government deficit in that​ year? Annual Deficit​ =

2.6-1.9= 0.7 trillion

If no foreign residents owned any of the U.S. public​ debt, then it would be true that

U.S. residents would essentially owe the public debt to themselves.

In each of the past few​ years, the federal government has regularly borrowed funds to pay for at least​ one-third of expenditures that tax revenues were insufficient to cover. More than 60 percent of all federal expenditures now go for entitlement spending. This fact implies that the government is paying for most of its discretionary expenditures

by borrowing.

If the U.S. federal government operates with a budget deficit it must borrow. In order to entice people to lend money to finance this​ deficit, the U.S. government must

pay a higher rate of interest on the bonds it sells.

​Directions: click on the graph in the window on the right and select Multiple Time Series to graph U.S. federal expenditures and receipts in billions of constant 2000 dollars for the years​ 1940-2005. For Y1 select U.S. federal expenditures and for Y2 select U.S. federal receipts. Roll your cursor over the plotted lines to identify the data. According to the​ figure, the U.S. federal government

B. has generated far more deficits than surpluses during the period​ 1940-2005. Y Axis 1: U.S. Federal Receipts, 2000 dollars Y Axis2: Gross Federal Debt, millions of dollars

What happens to the net public debt if the federal government operates next year with​ a: Budget deficit? Balanced budget? Budget Surplus?

Increases remains unchanged decreases

When government revenues exceed government outlays in a particular​ year, this is called

a budget surplus.

Suppose that the federal government had a budget deficit of​ $80 billion in year 1 and​ $10 billion in year​ 2, but it had budget surpluses of​ $140 billion in year 3 and​ $20 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four​ years, the Federal​ government's public debt would have

decreased by​ $70 billion.

When the Social Security Administration holds U.S. Treasury Bonds

interagency borrowing has occurred and the government owes itself.

Since the​ 1940s, more often than​ not, the U.S. federal government has

run a budget deficit.

A trade deficit implies that Generally a larger US trade deficit is accompanied by a

the dollar value of imports exceeds the dollar value of exports. a larger US federal government budget deficit.

If the economy is experiencing an inflationary​ gap, an increase in the budget surplus

will reduce the size of the inflationary gap.

When was the last year the United States had a budget​ surplus?

2001

Suppose that the economy is experiencing the​ short-run equilibrium position depicted at point B in the diagram at the left. ​1) Using the line drawing tool​, show the effects of an increase in the government deficit on equilibrium GDP and the price level. Properly label this line. ​2) Using the point drawing tool​, identify the new​ short-run equilibrium. Label this point​ 'E'. ​3) Using the point drawing tool​, identify the new​ long-run equilibrium. Label this point​ 'F'.

AD 1 line moved up and to the right and then the SRAS does not move the equilibrium price level rises E goes on the AD1 and SRAS intersection and F goes on the intersection of LRAS and AD1

Suppose that the economy is experiencing the​ short-run equilibrium position depicted at point A in the diagram to the right. Then the government raises its spending and thereby runs a budget deficit in an effort to boost equilibrium real GDP to its​ long-run equilibrium level of​ $14 trillion​ (in base-year​ dollars). ​1.) Using the line drawing tool​, show this change. Properly label your new line. ​2) Using the point drawing tool​, identify the new long run equilibrium. Label this point​ 'E'. Carefully follow the instructions​ above, and only draw the required objects.

AD1 line shifted to the right and up on the LRAS and SRAS line then the E new equilibrium point meets to the middle of all of them

To eliminate the deficit​ (and halt the growth of the net public​ debt), a politician suggests that​ "we should tax the​ rich." Suppose the politician defines​ "the rich" as people with annual taxable incomes exceeding​ $1 million per year. Given​ "the rich" rarely earn a combined taxable income exceeding​ $1 trillion, yet the federal deficit has regularly exceeded​ $1 trillion in recent​ years, which of the following must be​ true?

All of the above (A. To eliminate the​ deficit, government spending must be reduced. B. If government spending is not​ reduced, taxes on the middle class must be increased in order to eliminate the deficit. C. The deficit cannot be eliminated just by taxing​ "the rich.")

To eliminate the deficit​ (and halt the growth of the net public​ debt), a politician suggests that​ "we should tax the​ rich." Suppose the politician defines​ "the rich" as people with annual taxable incomes exceeding​ $1 million per year. Given​ "the rich" rarely earn a combined taxable income exceeding​ $1 trillion, yet the federal deficit has regularly exceeded​ $1 trillion in recent​ years, which of the following must be​ true?

All of the above.

To eliminate the deficit​ (and halt the growth of the net public​ debt), a politician suggests that​ "we should tax the​ rich." The politician makes a simple arithmetic calculation in which he applies the higher tax rate to the total income reported by​ "the rich" in a previous year. He says that this is how much the government could receive from increasing taxes on​ "the rich." This argument has been proved wrong because of all the following​ statements, except

C. that taxing​ "the rich," since they have higher​ earnings, is the answer to solving the problem of a growing deficit.

Directions: click on the graph in the window on the right and select Multiple Time Series to graph the U.S. gross and net federal debt to GDP ratio for the years​ 1940-2005. For Y1 select Gross Federal​ Debt, percentage of GDP and for Y2 select Net Federal​ Debt, percentage of GDP. Roll your cursor over the plotted lines to identify the data. Use the figure to help determine which of the following statements are true.

Federal U.S. gross and net debt to GDP ratios follow similar patterns. Although the difference between the two was very small during the World War II​ years, it has been steady from the early​ 1950's to the late​ 1980's, and has been increasing since the late​ 1980's. ​ Therefore, the percentage of U.S. federal debt held by federal government agencies compared to the total public debt outstanding has been​ increasing, starting in the early​ 1990's. Y Axis 1: Net federal debt, percentage of GDP Y axis2: U.S. Federal Expenditures, percentage of GDP

Which of the following correctly describes a way in which deficit spending can impose a burden on future​ generations? I. Failure to allocate deficit spending to uses that boost future real Gross Domestic Product​ (GDP) will require taxing future generations at a higher rate to repay the resulting higher public debt. II. Government deficits that lead to higher employment and real Gross Domestic Product​ (GDP) in the future will generate increased income taxes for future​ governments, which will respond by spending the higher tax ​ revenues, creating higher future government budget deficits. III. Other things being​ equal, deficit spending fuels increased consumption of goods and services by the current generation that crowds out capital​ investment, thereby leaving future generations with a smaller stock of capital than otherwise would have existed.

I and III only

Which of the following is true of the relationship between U.S. trade deficits and federal government budget​ deficits?

Increases in the budget deficit tend to be associated with increases in the trade deficit.

The U.S. federal government has contemplated ways to reduce its national debt. Which of the following suggestions would best enable the government to achieve this​ goal? Entitlements in the U.S. are

Reduce government​ spending, raise​ taxes, or both. non-discretionary expenditures that have been legislated by Congress.

Directions: click on the graph in the window on the right and select Multiple Time Series to graph the U.S. budget deficit and U.S. trade deficit for the years​ 1970-2004. For Y1 select U.S. Federal Budget Deficit or Surplus and for Y2 select U.S. Trade Balance Surplus or Deficit​ (both goods and​ services). Roll your cursor over the plotted lines to identify the data. The plotted series show that while there were a few small​ sub-periods during which the two deficits moved in opposite​ directions, the two deficits exhibit​ co-movement. The positive relationship between the US government budget and trade deficits is supported because large U.S. government deficits are mainly financed through increases in government debt​ (bonds). This results in higher U.S. interest rates which in turn attract capital to the U.S. This in turn causes

an appreciation of the U.S. dollar. Dollar appreciation makes U.S. exports more expensive and U.S. imports​ cheaper, and​ thus, a larger U.S. trade deficit. YAxis1: U.S Federal Budget Surplus or Deficit Yaxis2: U.S. Federal Expenditures

In 2005 national government spending is ​$4.00 trillion and tax collections are ​$4.25 trillion. This​ government, in​ 2005, experienced a

budget surplus

As the interest rate or yield on U.S. bonds​ increases, foreigners

buy more U.S. bonds and fewer U.S. goods and services.

Which of the following is NOT an example of a flow​ variable?

capital stock

Explain how each of the following will affect the net public​ debt, other things being equal. a. ​Previously, the government operated with a balanced​ budget, but recently there has been a sudden increase in federal tax collections. The net public debt b. The federal government had been operating with a very small annual budget deficit until three successive hurricanes hit the Atlantic​ Coast, and now government spending has risen substantially. The net public debt c. The General National Mortgage​ Association, a federal government agency that purchases certain types of home​ mortgages, buys U.S. Treasury bonds from another government agency. The net public debt

decreases increases remains unchanged

Explain how each of the following will affect the net public​ debt, other things being equal. a. Until​ recently, the federal government has been operating with a very small annual budget surplus. Now Congress has eliminated several expenditure programs that it has decided wasted funds provided by taxpayers. The net public debt b. Using funds raised from issuing bonds to another government​ agency, the U.S. Treasury decides to buy back bonds that it had issued three years ago to a different government agency. The net public debt c. ​Previously, the government operated with a balanced​ budget, but there has been a drop in personal incomes and a corresponding decrease in individual income tax collections. The net public debt

decreases remains unchanged increases

Suppose that the federal budget deficit decreases The decrease in government borrowing will cause interest rates to _____ In an open​ economy, this will make U.S. bonds___ to overseas residents, who will buy ______ bonds and _____ U.S. exports, and thus the trade deficit will ______

fall less attractive less more fall

Suppose the dollar value of imports to the U.S. exceed the dollar value of exports from the US. This implies that If foreigners have an excess supply of dollars after trading goods and services they will likely

foreigners are holding an excess supply of dollars. buy more U.S. Treasury bonds

The net public debt is equal to

gross government debt minus all government interagency borrowing.

The accumulation of borrowing by all federal government agencies is referred to as the When considering the gross public​ debt, one can argue that it is overstated because

gross public debt. the federal government owes itself money.

​Directions: click on the graph in the window on the right and select Multiple Time Series to graph U.S. federal expenditures and receipts in billions of constant 2000 dollars for the years​ 1940-2005. For Y1 select U.S. federal expenditures and for Y2 select U.S. federal receipts. Roll your cursor over the plotted lines to identify the data. According to the​ figure, the U.S. federal government

has generated far more deficits than surpluses during the period​ 1940-2005.

Suppose that the share of U.S. GDP going to domestic consumption remains constant.​ Initially, the federal government was operating with a balanced​ budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit​ spending, the government has issued bonds. So​ far, very few foreign residents have shown any interest in purchasing the bonds. a. What must happen to induce foreign residents to buy the​ bonds? b. If foreign residents desire to purchase the​ bonds, what is the most important source of dollars to buy​ them?

interest rates must rise Dollars used to purchase U.S. exports

As a possible approach to eliminating the government budget​ deficit, increasing taxes on the rich only would

not lead to a significant increase in tax revenues.

If the U.S. federal government operates with a budget deficit it must borrow. In order to entice people to lend money to finance this​ deficit, the U.S. government must As the interest rate or yield on U.S. bonds​ increases, foreigners

pay a higher rate of interest on the bonds it sells. buy more U.S. bonds and fewer U.S. goods and services.

Suppose that an particular economy has a real GDP of 60.0 trillion in 2004. It grows to 66.0 trillion in 2005.​ Meanwhile, the national debt was 40.0 trillion in 2004. In 2005 the federal government ran a budget deficit of 4.0 ​trillion, which was totally financed by borrowing. Given this set of circumstances the national debt as a percentage of real GDP has

remained constant

Since​ 2001, more often than​ not, the U.S. federal government has Which of the following is a reason for this resurgence in federal government budget​ deficits?

run a budget deficit. Tax revenue not keeping pace with growth in spending.

If the federal government has a budget deficit it can finance its spending by Which of the following statements is true regarding the national debt and federal government​ deficits?

selling Treasury bonds. There is a positive relationship between the national debt and a federal government budget deficit.

A natural consequence of the government continually spending more than what it takes in through tax​ receipts, ceteris​ paribus, is that

the government takes up a larger percentage of the economic activity.

Directions: click on the graph in the window on the right and select Time Series to graph the U.S. federal trade deficit​ (surplus) to GDP ratio for the years​ 1970-2005. For Y Axis 1 select U.S. federal government​ deficit, percent of GDP. Use the figure to help determine which of the following statements are true.

​1998-2001 are the only years that the U.S. federal government recorded surpluses. YAxis1: Gross Federal Debt, percentage of GDP YAxis2: U.S. Deficit, percent of GDP