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BECO 1. Dr. Andrew L. H. Parkes “The Federal Government’s Budget Constraint”. 卜安吉. Interest rates to Zero %. So now the Fed must use OTHER ways to “ease” credit conditions!. The Government Budget Constraint.

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Beco 1


Dr. Andrew L. H. Parkes

“The Federal Government’s Budget Constraint”


Interest rates to zero

Interest rates to Zero %

So now the Fed must use OTHER ways to “ease” credit conditions!


The government budget constraint

The Government Budget Constraint

The Constraint Abbreviations

  • G is Government Spending

  • T is Tax Revenue Income

  • D Bonds is NEWLY Issued Bonds

  • D MB is Printed Money (or Currency plus Total Reserves)

The U.S. Budget


The government budget constraint1

The Government Budget Constraint

The Constraint

G - T = D Bonds +D MB

You may not use this formula

on the test – use the words!

The U.S. Budget


Government spending

Government Spending

  • Government expenditures are required of all governments.

  • Everything provided by the “public” sector of the economy.

  • Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc.


Tax revenue income

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.


U s treasury bills notes and bonds

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.


Change in the monetary base

Change in the Monetary Base

  • Commonly called “Printing Money”

  • When the Federal Reserve Prints currency to specifically buy bonds. (or increases the level of reserves at the Fed)

Federal Reserve Notes A Liability of the Fed


Spending versus taxes

Spending versus taxes

  • Taxes – paid today

  • Bonds – taxes tomorrow (when the bonds mature)

  • Printing money leads to inflation

  • Inflation tax - $ worth less (or seignorage)

Federal Reserve Notes A Liability of the Fed




  • 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.


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