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Macroeconomics Notes Chapter 18

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Macroeconomics Notes Chapter 18 Powered By Docstoc
					XVIII -- 1 Econ 202 Topic: McConnell & Brue Chapter 18 - 15th Edition Deficits, Surpluses, and the Public Debt I. Major Points of Countercycle Fiscal Policy 1. Federal Budget should move toward deficit during recessions (increase G and/or decrease T)

2. Federal Budget should move toward surplus during expansion (decrease G and/or increase T)

II. Contrasting Budget Philosophies 1. Anually Balanced Budget (G = T) Rules out the use of federal budget to counteract economic cycles

2. Cyclically Balanced Budget (1) Federal budget should be balanced over the business cycle.

(2) Will have budget deficits during recessions and budget surpluses during expansions.

(3) This is "active" countercyclical fiscal policy.

XVIII -- 2 3. Functional Finance (1) Primary purpose of federal budget is to promote major economic goals.

(2) Balanced federal budget is of secondary importance.

4. Full Employment Budget (1) What federal budget would be if had full employment.

(2) Provides a measure of the "cost" of unemployment in terms of lost or foregone output.

III.

Public Debt (Accumulation of all past federal government deficits) 1. Approximate Oct. 2003 debt level = $6.9 Trillion.

2. Size relative to GDP = about 64%.

XVIII -- 3 3. Interest cost as percent of GDP = about 2.4%.

4. Annual interest cost is third highest expenditure of federal government, about $277 billion.

5. Historical change in U.S. government debt – Table 18.1 - 15th Edition

6. Federal debt ownership Figure 18.1 - 15th Edition

7. U.S. debt as percent of GDP compared to other industrialized countries (2000) (page 344--Global Perspective)

8. In the years 1998, 1999, and 2000, increased debt of Federal Government by $261 billion.

9. In years 2001, 2002, and 2003 have increased Federal Government debt by $1.2 trillion.

XVIII -- 4 IV. Who Owns U.S. Debt (1997)? 1. State and Local Government 21%

2. U.S. Government Agencies 29%

3. Foreigners 23%

4. Banks and other Financial Institutions 12%

5. Federal Reserve 8%

6. U.S. Individuals 7%

XVIII -- 5 V. Public Sector Debt as Percent of GDP (1997) 1. Belgium 126% 2. Italy 122% 3. Canada 98% 4. Sweden 79% 5. Japan 91% 6. Finland 62% 7. Denmark 70% 8. United States 64% (2003) 9. Britain 42% 10. Germany 65% 11. France 64%

VI. Causes of Public Debt 1. Finance wars

2. Discretionary fiscal policy

3. Personal and corporate tax reductions

4. Increases in defense spending

5. Increases in social spending programs

XVIII -- 6 VII. Real Burdens of the Public Debt 1. External burden -- debt owned by foreigners

2. Internal burden (1) Lower consumption

(2) Lower investment

(3) Lower economic growth

3. Incentives to work affected if taxes increase

4. Crowding out effect

5. Possible income redistribution

6. Existence may be inflationary

7. Possible wasteful government spending