Gov’t Policy Macro Unit 5

Which is…

During a given time period, your spending exceeds your earnings

debt deficit surplus

During a given time period, your earnings exceed your spendingTotal amount owed at a specific moment in time.

A. Debt/Deficit

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

http://www.brillig.com/debt_clock?

http://www.publicdebt.treas.gov/opd/opdpenny.htm

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 7,932,709,661,723.5009/30/2004 7,379,052,696,330.32

09/30/2003 6,783,231,062,743.6209/30/2002 6,228,235,965,597.16

09/30/2001 5,807,463,412,200.06

09/30/2000 5,674,178,209,886.86

http://www.treasurydirect.gov/

USA Debt

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

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

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

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

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

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%

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%

Vicky works 30 hours this weekand gets paid $6an hour.

She will make $180 this week.This is called “personal income” often abbrev Y

But the governmenthas to take...

Governmenttakes out:Federal TaxState TaxFICAMedicare

What is left over iscalled “DisposableIncome” = DY

B. Income / Savings

What can a persondo with this DisposableIncome? C

S

+

Most individuals do a mixture of both C and S.

What is the formula for income?

Y = C + S

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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

Y1

AD1

LRAS

AD2

Y2

economy

ADleft

right

AD

SRAS

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:

ADdemand side policies – seek to improve the economy by shifting the _____ curve towards ______________ -- monetary & fiscal policysupply 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

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

causes of inflation

(1) quantity theory of money

a rise in the money supply causes inflation -- equation of exchange:

___ ___ = ___ ___ where....

M = ___________ V = ____________

P = ___________ Q = ____________

M V P Q

money supply

price level

velocity of moneyquantity sold / output

since V constant and Q independent

M V P Q

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

prices

production

the cost of factors of _____________ rise so that businesses must raise their _________

salary

(3) cost-push inflation

inside lag time – time it takes gov’t to 1st - collect _______; 2nd - ________ there’s a problem; 3rd - ________ what policy to apply; and 4th - ___________ the policy.

problem #2 -- lag time

Fiscal & Monetary Policy

data realizedecid

eimplement

outside lag time – time it takes the ___________ to respond to new policy

economy

the inside lag time is greater for monetary ....or....fiscal policy?

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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

spendingbringing

in

G AD

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