Important Terms from Anderson Chapter 25 How Much Debt is Too Much?

The Government Budget Surplus – Government revenues exceed expenditures Deficit – Government expenditures exceed revenues Debt – Accumulated deficits that carry over

Spending and Debt Expenditure smoothing – Using debt to regularize expenditures over a long term Don’t need to pay for a new bridge in one year Friedman’s Permanent Income Hypothesis – People consider income (revenues) over entire life when considering to save or borrow

Ricardian Equivalence David Ricardo – classical economist – Whether government spends out of new taxes or out of borrowing makes no difference – If government borrows, citizens will save an equal amount in order to pay back debt – Purchase of Treasury bonds approximates this, but mostly it doesn’t hold true Have you saved up to pay your share of the cost of the war in Syria?

Crowding Out Some economists believe that government borrowing leads to higher interest rates that deters private investment – Full crowding out means every $1 in government borrowing results in $1 less in investment – Partial crowding out may exist, but interest rates have remained low despite massive government borrowing