1. Principles of Macroeconomics Special PowerPoint Dr. Andrew L. H. Parkes “The Federal Government’s Budget Constraint” 卜安吉

2. April 13, 2010Principles of Macroeconomics2 Interest rates to Zero % http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&hp So now the Fed must use OTHER ways to “ease” credit conditions!

3. April 13, 2010Principles of Macroeconomics3 The Government Budget Constraint The Constraint Abbreviations  G is Government Spending  T is Tax Revenue Income   Bonds is NEWLY Issued Bonds   M s is Printed Money The U.S. Budget http://www.gpoaccess.gov/usbudget/index.html

4. April 13, 2010Principles of Macroeconomics4 The Government Budget Constraint The Constraint G - T =  Bonds +  M s The U.S. Budget http://www.gpoaccess.gov/usbudget/index.html You may not use this formula on the test – use the words!

5. April 13, 2010Principles of Macroeconomics5 Government Spending Government expenditures are required of all governments. Government expenditures are required of all governments. Everything provided by the “public” sector of the economy. Everything provided by the “public” sector of the economy. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc.

6. April 13, 2010Principles of Macroeconomics6 Tax Revenue Income Tax revenue includes any fees, assessments or taxes collected by the government. Income taxes, utility taxes or revenue collections, tolls for highways, fees for park entrance, sales taxes, property taxes, etc. http://www.irs.gov/

7. April 13, 2010Principles of Macroeconomics7 U.S. Treasury Bills, Notes, and Bonds Debt or borrowing of the government. The U.S. has the lowest cost of borrowing, that is the least risk or lowest interest rate due to the lack of default risk. NEW borrowing – not debt issued to cover bonds maturing which need refinancing.

8. April 13, 2010Principles of Macroeconomics8 Change in the Money Supply Commonly called “Printing Money” Commonly called “Printing Money” When the Federal Reserve Prints currency to specifically buy bonds. When the Federal Reserve Prints currency to specifically buy bonds. Federal Reserve Notes A Liability of the Fed

9. April 13, 2010Principles of Macroeconomics9 Spending versus taxes Taxes – paid today Taxes – paid today Bonds – taxes tomorrow (when the bonds mature) Bonds – taxes tomorrow (when the bonds mature) Printing money leads to inflation Printing money leads to inflation Inflation tax - $ worth less Inflation tax - $ worth less Federal Reserve Notes A Liability of the Fed

10. April 13, 2010Principles of Macroeconomics10 LIBOR Investopedia explains London Interbank Offered Rate - LIBOR in plain english... Investopedia explains London Interbank Offered Rate - LIBOR in plain english... The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. http://www.investopedia.com/terms/l/libor.asp