1 / 15

The deficit and the debt

The deficit and the debt. The deficit and the debt. What is the current national debt? Debt Clock Two primary tools of discretionary fiscal policy: spending (G) taxes (T). Expansionary fiscal policy .

derex
Download Presentation

The deficit and the debt

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The deficit and the debt

  2. The deficit and the debt • What is the current national debt? • Debt Clock • Two primary tools of discretionary fiscal policy: • spending (G) • taxes (T)

  3. Expansionary fiscal policy • When government conducts expansionary fiscal policy to counteract recession, spending (G) increases and/or taxes (T) decrease.

  4. Contractionary fiscal policy • When the government conducts contractionary fiscal policy to alleviate inflationary pressures, governments spending (G) decreases and/or taxes (T) increases.

  5. budget deficit • When G =T, government has balanced budget • When G increases and/or T decreases, government budget moves toward deficit • Deficit occurs when government spends more than it collects in taxes and borrows to cover the difference; G › T. • This is done by issuing bonds.

  6. budget deficit • The sum of all past deficits is the debt. • A budget deficit results in an increase in the demand for loanable funds.

  7. Budget surplus • When T › G, there is a budget surplus. • A budget surplus reduces the demand for loanable funds. • If government pays off debt, there is an increase in loanable funds.

  8. Loanable funds market I and i are initial equilibrium values D=private sector demand for funds (investment). D+(G-T)=private + gov. demand for funds. I1 andi1 are the new equilibrium Values I2=new level of private investment I1-I2 = government demand for funds (G-T) • D + (G-T) Real Int. rate S i1 i D I I1 Q loanable funds I2

  9. Crowding out • Crowding out refers to the decrease investment and consumption that occurs when the government’s demand for loanable funds causes the interest rate to rise. • The demand by government for loanable funds decreases or crowds out the private demand for loanable funds.

  10. Crowding out • From whom does the government borrow money to cover its debt? • Individuals • Institutions • Other gov. agencies • If you want to learn more, check out the • Bureau of the Public Debt. You can browse all sorts of fiscal policy data.

  11. Crowding out • What are some of the lags associated with policy making? • Inside lags: • Time for collecting data • Time for policy makers to recognize that policy action is necessary • Deciding which policy should be undertaken • Time to implement the policy

  12. Crowding out • Outside lag: • Time for the economy to respond to the policy • The lags differ in time for monetary and fiscal policy • Complete activity 5-7

  13. Crowding out

More Related