Chapter 15 introducing Deficits and Debt

Chapter Goals  Define the terms deficit, surplus, and debt and distinguish between a cyclical deficit and a structural deficit  Differentiate between real and nominal deficits and surpluses  Explain why the debt needs to be judged relative to assets  Describe the historical record for the U.S. deficit and debt

Defining Deficits and Surpluses  A deficit is a shortfall of revenues under payments  A surplus is an excess of revenues over payments

In the Short Run 1

Deficit Short Run if below potentialare good  In the short run, if the economy is below potential, deficits are good because deficits increase expenditures moving output closer to potential

2 In the Long Run

Surpluses Long-Run surplusesgood Long-run surpluses are good because they provide saving for investment

We Are Back To Trade Off Short Run or Long Run? 1 Short Run DeficitGood 2 Long Run SurplusGood

Who Makes Fiscal Policy? The President and Congress make fiscal policy – This is complicated and can be time consuming, especially when one political party controls Congress while the president belongs to the other party – No one seems to be in charge of making fiscal policy Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.

The Deficit Dilemma** Deficits, Surpluses, and the Balanced Budget spending is greater than tax revenue – When government spending is greater than tax revenue, we have a federal budget deficit The government borrows to make up the difference Deficits are prescribed to fight recession Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Deficits Spending TaxRevenue

The Deficit Dilemma Deficits, Surpluses, and the Balanced Budget tax revenue is greater than government spending – When the budget is in a surplus position, tax revenue is greater than government spending Budget surpluses are prescribed to fight inflation Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Surplus Spending TaxRevenue

The Deficit Dilemma Deficits, Surpluses, and the Balanced Budget government expenditures are equal to tax revenue – We have a balanced budget when government expenditures are equal to tax revenue We’ve never had an exactly balanced budget Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.