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 Run1

Deficit Short Run

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

• Long-run surpluses are good because they provide saving for investment

We Are Back To Trade Off

Short Run or Long Run?

1Short RunDeficit Good

2Long RunSurplus

Good

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

12-33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

The Deficit Dilemma**

• Deficits, Surpluses, and the Balanced Budget– 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

12-35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Deficits

Spending Tax

Revenue

The Deficit Dilemma

• Deficits, Surpluses, and the Balanced Budget–When the budget is in a surplus

position, tax revenue is greater than government spending• Budget surpluses are prescribed to

fight inflation

12-36Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Surplus

Spending Tax

Revenue

The Deficit Dilemma

• Deficits, Surpluses, and the Balanced Budget–We have a balanced budget when

government expenditures are equal to tax revenue•We’ve never had an exactly balanced budget

12-37Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.