Chapter 12: Deficits and Debt
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.