1. Gov’t Policy Macro Unit 5

2. Which is… During a given time period, your spending exceeds your earnings debtdeficit surplus During a given time period, your earnings exceed your spending Total amount owed at a specific moment in time. A. Debt/Deficit

3. When the government is spending at a deficit, it must find a way to ______ for its spending. The U.S. finances its deficit by selling ________ or ___________which are basically promises to re-pay money in the future. When I buy this bond for my daughter I am basically __________ money to the government. pay bonds loaning securities

4. http://www.brillig.com/debt_clock? http://www.publicdebt.treas.gov/opd/opdpenny.htm

5. Date Dollar Amount 09/30/2008 10,024,724,896,912.49 09/30/2007 9,007,653,372,262.48 09/30/2006 8,506,973,899,215.23 09/30/2005 7,932,709,661,723.50 09/30/20047,379,052,696,330.32 09/30/2003 6,783,231,062,743.62 09/30/20026,228,235,965,597.16 09/30/2001 5,807,463,412,200.06 09/30/2000 5,674,178,209,886.86 http://www.treasurydirect.gov/ USA Debt

6. When looking at the debt burden of an economy, economists look at the debt as a percentage of ______. In the early 2000’s the US debt as a percentage of GDP was around _____%. GDP 59 6 of 20

7. http://zfacts.com/p/318.html

8. What do you think happened to the US debt as a percentage of GDP in 2004--2009?

9. Interest payments each year on the debt 2000$361,997,734,302.36 1999$353,511,471,722.87 1998$363,823,722,920.26 1997$355,795,834,214.66 1996$343,955,076,695.15 1995$332,413,555,030.62 1994$296,277,764,246.26 1993$292,502,219,484.25 1992$292,361,073,070.74 1991$286,021,921,181.04 1990$264,852,544,615.90 1989$240,863,231,535.71 http://www.publicdebt.treas.gov/opd/opdint.htm What’s the part of debt that hurts the most? interest payment

10. To whom is our debt owed? Here is a pie chart showing the makeup, or ownership, of the National Debt as of December 1998. So in many cases, to whom are we paying interest? ourselves

11. 2009 National Debt $11,009,248,260,083 Top 15 Holders of U.S. Gov't Bonds Federal Reserve and US Intragovernmental Holdings $4,806,000,000,000 43.65% Mutual Funds $769,100,000,000 6.99% China $739,600,000,000 6.72% Japan $634,800,000,000 5.77% State and Local Governments $522,700,000,000 4.75% Pension Funds $456,400,000,000 4.15% Other Investors $413,200,000,000 3.75% Oil Exporters $186,300,000,000 1.69% Caribbean Banking Centers $176,600,000,000 1.60% Brazil $133,500,000,000 1.21%

12. 2009 National Debt $11,009,248,260,083 Top 15 Holders of U.S. Gov't Bonds (con’t) Insurance companies $126,400,000,000 1.15% United Kingdom $124,200,000,000 1.13% Russia $119,600,000,000 1.09% Depository Institutions $107,300,000,000 0.97% Luxembourg $87,200,000,000 0.79% 85.41% others 14.59% 100.00%

13. Vicky works 30 hours this week and gets paid $6 an hour. She will make $180 this week. This is called “personal income” often abbrev Y But the government has to take... Government takes out: Federal Tax State Tax FICA Medicare What is left over is called “Disposable Income” = DY B. Income / Savings

14. What can a person do with this Disposable Income? C S + Most individuals do a mixture of both C and S.

15. What is the formula for income? Y = C + S 12 of 20

16. The opposite is also true. If individuals as an aggregate increase their consumption relative to their savings, ____ shifts to the ________. As a result PL _____, unemployment ____, output _____ If individuals as an aggregate increase their savings relative to their consumption, _____ shifts to the _________. Q = Real GDP = Y price level Y1Y1 AD 1 LRAS AD 2 Y2Y2 economy AD left right  AD SRAS

17. C. Types of Policies full employment We’ve learned that..... we want the economy performing at equilibrium at _____ _____________ output & that more is better so we want growth. 2 types of policies: AD demand side policies – seek to improve the economy by shifting the _____ curve towards ______________ -- monetary & fiscal policy supply side policies – seek to improve the economy by shifting the _______ curve out – (1) tax subsidies for investment, (2) encourage R&D, (3) encourage trade equilibrium LRAS

18. Potential problems if the gov’t under takes expansionary or contractionary policies: problem #1 -- expansionary policy may cause inflation primary theories as to the cause of inflation Fiscal & Monetary Policy D. Problems with Policies

19. causes of inflation (1) quantity theory of money a rise in the money supply causes inflation -- equation of exchange: ___ ___ = ___ ___where.... M = ___________V = ____________ P = ___________Q = ____________ MV P Q money supply price level velocity of money quantity sold / output since V constant and Q independent M V  P Q

20. causes of inflation (2) demand-pull inflation when economy is above potential output, shortages of goods & workers, firms will raise _________ and workers will raise _________ demands. prices production the cost of factors of _____________ rise so that businesses must raise their _________ salary (3) cost-push inflation

21. inside lag time – time it takes gov’t to 1 st - collect _______; 2 nd - ________ there’s a problem; 3 rd - ________ what policy to apply; and 4 th - ___________ the policy. problem #2 -- lag time Fiscal & Monetary Policy datarealize decide implement outside lag time – time it takes the ___________ to respond to new policy economy the inside lag time is greater for monetary....or....fiscal policy? 18 of 20

22. To get out of the recession the government wants to increase ___ so it can shift ____ to the right. But what’s the problem with increasing G? Let’s say the economy is in a recession and at the same time is running a deficit – that means for that year it is __________ more than it is _____________ problem #3 -- crowding out Fiscal & Monetary Policy spending bringing in GAD

23. To ________ this spending, gov’t must _____ bonds so that it brings money in  the gov’t must make them attractive with a relatively higher ________ _____ which tends to drive up i in the economy. problem #3 -- crowding out pay for sell interest rate This is what we call deficit spending – the gov’t is spending more money than it’s bringing in. Look at some overheads to graphically show crowding out