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Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 15.3 PowerPoint PPT Presentation


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Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 15.3. Economics Mr. Biggs. Budget Deficits and the National Debt. Balancing the Budget When the federal government’s revenues equal its e xpenditures in any year, the federal government has a balanced budget.

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Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 15.3

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Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

Unit 7 Macroeconomics:

Taxes, Fiscal, and Monetary Policies

Chapters 15.3

Economics

Mr. Biggs


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • Budget Deficits and the National Debt

Balancing the Budget

When the federal government’s revenues equal its expenditures in any year, the federal government has a balanced budget.

Balanced budget - A budget in which revenues are equal to spending.

The federal budget is seldom balanced

and usually runs at adeficit.

Budget deficit - A situation in which the government spends more than it takes in.

Budget surplus - A situation in which the government takes in more than it spends.


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • Responding to Budget Deficits

  • If the government is running a deficit, it

  • must create money or borrow money.

  • Creating Money

    The government could create new money

    to pay for small deficits, but for large deficits,

    it could lead to inflation or hyperinflation.

    Hyperinflation - Very high inflation.

    For example, post WWI Germany.

  • Borrowing Money

    An alternative to creating money is to borrow money by issuing T-bills, T-notes, and T-bonds.

    Wise borrowing can create more goods and public services but also has serious disadvantages.

    For example, building airports and highways.


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • The National Debt

  • The problem with having a yearly deficit

  • is that it creates a national debt.

  • National debt - All the money that the

  • federal government owes to bondholders.

  • By the end of 2013, it is estimated to be

  • almost $16 trillion dollars.

  • At this amount, the government’s overall debt surpasses the total size of the US economy (GDP).

  • The Difference Between Deficit and Debt

  • The national deficit is the amount of

  • money that the government borrows

  • for one budget.

  • The national debt is the total of all

  • deficits and surpluses.


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • Measuring the National Debt

  • Currently, the national debt is very large, but historically, it increased during times of war and decreased in peace time.

  • However, during Reagan’s presidency, government spending increased and taxes were lowered.

  • This trend continued during George W. Bush’s presidency.

  • Is the Debt a Problem?

  • In general, two problems can arise from a national debt:

    • Reduced funds for investment

    • Interest payment to bondholders


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • Problems of the National Debt

  • The first problem is that national debt reduces the funds available for businesses to invest and leads to the crowding-out effect.

  • Crowding-out effect - The loss of funds for private investment due to government borrowing.

  • The second problem is that the government must pay interest on the money it borrows which is called “servicing the debt”.

  • Interest payments are expected to total some $4.2 trillion over the next decade.

  • Other Views of a National Debt

  • Traditional Keynesian economists believe that fiscal policy is an important tool that can be

  • used to help achieve full productive capacity.

  • The benefits outweigh the costs of interest on the national debt unless the debt grows too big (debt > 100% of GDP).


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • Deficits, Surpluses, and the National Debt

  • Controlling the deficit is difficult because

  • much of the budget consists of

  • entitlements, interest paid to bondholders,

  • and specific budget cuts are often

  • opposed by groups affected.

  • Efforts to Reduce Deficits

  • In the 1980s, the Gramm-Rudman-Hollings

  • Act was passed and required automatic expenditure reductions if the deficit exceeded a certain amount.

  • It was declared unconstitutional in 1990.

  • In 1990, President Bush created the “pay as you

  • go system” that required Congress to raise enough revenue to cover direct increases in spending.

  • In 1995, a balanced budget amendment

  • failed to pass by one vote in the Senate.

  • People feared it would make the federal

  • budget too inflexible.


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

  • End-of-Century Surpluses

  • By the start of the 21st century, the federal government

  • was running a surplus for the first time in 30 years.

  • The surplus was partially

  • as a result of President

  • Clinton raising taxes,

  • a strong economy,

  • and low unemployment.

  • The Future of Fiscal Policy

  • Many economists and politicians now see Keynesian fiscal policy as a way to influence the economy only in the short term.


Unit 7 macroeconomics taxes fiscal and monetary policies chapters 15 3

The End


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