Ch. 13

Paying off an internally held debt

would not burden the economy as a whole

The problem of time lags in enacting and applying fiscal policy is

*In the time it takes to identify the situation enact a policy, and allow it to work, economic circumstances may have changed.

T/F: The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

False

The Federal Reserve and federal gov't agencies hold more than three-fourths of the public debt.

False

As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.

False.

The federal gov't establishes its budget to decide what programs to provide and how to pay for them. How does fiscal policy differ from this ordinary fiscal activity of budgeting?

Fiscal policy is a tool that alters *macroeconomic activity* to achieve specific macroeconomic objectives, and fiscal activity to address *economic and non economic priorities.

T/F: An internally held public debt is like a debt of the left hand owed to the right hand

True

Refinancing of the public debt might drive up real interest rates because

gov't borrowing to finance the debt increases demand for funds and competes with private borrowing

Define the cyclically adjusted budget, explain its significance, and state why it may differ from the actual budget.

*The cyclically adjusted budget measures what the federal deficit or surplus would be if the economy reached the *full-employment* level of GDP Actual federal budget deficits can go up or down because of changes in GDP, changes in fiscal policy, or both. Deficits caused by changes in GDP are called cyclical deficits. The cyclically adjusted budget removes cyclical deficits from the budget and therefore measures the budget deficit or surplus that would occur is the economy operated at its full-employment output. Changes in cyclical budget deficit or surplus provide meaningful information as to whether the gov't's fiscal policy is expansionary, neutral, or contractionary. (Changes in actual budget deficit or surplus do not because such deficits or surpluses can include cyclical deficits or surpluses.

What are gov'ts fiscal policy options for moving the economy out of a recession?

1) increase gov't spending. 2) reduce taxes 3) use some combination of the two Expansionary fiscal policy will create a government budget deficit. - gov't spending in excess of tax revenues.

Social Security and Medicare trust funds are projected to be depleted by

2033 and 2024, respectively

The crowding-out effect is

A reduction in investment spending caused by an increase in interest rates arising from an increase in gov't spending.

Explain how built-in (or automatic) stabilizers work.

By changing *tax revenue and gov't payouts* so that GDP changes are reduced. Anything that increases the gov'ts deficit (or reduces budget surplus) during a recession. and increases its budget surplus (or reduces its budget deficit) during inflation without requiring explicit action by policy makers. Ex: U.S tax system, tax rates, the tax revenues then vary directly with the level of GDP.

The two ways to measure the public debt are

Its absolute dollar size and its relative size as a percentage of GDP.

Why did the budget surpluses in 2000 and 2001 give way to a series of budget deficits beginning in 2002? Why did those deficits increase substantially beginning in 2008?

a) Budget deficits in 2002 were due to *the recession and tax cuts* b) Deficits increased substantially in 2008 because of *fiscal stimulus after the financial collapse* Congress chose to reduce marginal tax rates and phase out federal estate tax in 2001. Then, federal spending for the war on terrorism rocketed, and Congress accelerated tax reductions. (implemented expansionary fiscal policy) Obama's Congress enacted a massive stimulus, cyclically adjusted budget deficit shot up in 2008, then decreased substantially in 2014.

Social Security and Medical trust funds are

assets held by these programs to help pay for future projected tax revenue shortfalls.

Expectations of near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again.

Refinancing of the public debt might cause

higher interest rates, which can lower investment, and economic growth slows.

Paying off an externally held debt

may lower the dollar exchange rate

When economists say Social Security and Medicare are "pay-as-you-go" plans, they mean

most of the current revenues from SS tax are paid to current SS retirees.

A political business cycle is the idea that

politicians are more interested in reelection than in stabilizing the economy

How does the "ratchet effect" affect anti-inflationary fiscal policy?

price level rises, but declines in aggregate demand to not seem to push the price level downward. *Stopping further shift, not to restore to a lower price level.

If the public investment financed through borrowing complements private investment,

private borrowers may be willing to pay higher interest rates associated with financing the public debt.

Refinancing the public debt means

selling new bonds to retire maturing bonds

The distinction between the absolute and relative sizes of the public debt is important because

the absolute size doesn't tell you about an economy's capacity to repay the debt

The key to long-run problem of both Social Security and Medicare is

the aging population and age distribution of the U.S. population

An internally held debt is one in which

the bondholders live in the nation having debt

If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then

the gov't would have to increase taxes or go even deeper into debt to make the payments