Debt

Question 1

Define national debt (public sector debt)

Answer 1

Total of all outstanding government borrowing from the private sector

Question 2

Define budget deficit

Answer 2

Excess of government spending over government receipts for a time period

Question 3

Define budget surplus

Answer 3

Government spending is smaller than government receipts for a time period

Question 4

Define cyclical deficit

Answer 4

Government spending is greater than receipts as a result of a slowdown/recession in the economic cycle

Question 5

Define structural deficit

Answer 5

Government spending is greater than receipts regardless of the stage of the economic cycle

Question 6

Define debt interest

Answer 6

Payments that the government need to pay to holders of government bonds

Question 7

Define net borrowing

Answer 7

Borrowing undertaken by the government each year subtract any debt that is paid off

Question 8

What are the problems with debt

Answer 8

Intergenerational inequity —> higher borrowing will have to be repaid in the long run —> may require increase in taxes and lower G in long run —> viewed as unfair
Opportunity cost —> servicing debt could have been spent on other areas of the economy
Exchange rate instability —> lack of capital market confidence in the governments ability to service its debt can result in financial institutions selling bond and moving to an economy with more reliable government bonds —> increases the supply and depreciates the currency

Question 9

Explain the process of financial crowding out

Answer 9

G>T
Government must borrow so has to sell extra bonds
Government increase the interest rates in order to attract investors
Higher rates by the central bank will push up the bank rates and interest rates will rise
Higher interest rates discourage private sector borrowing so AD is reduced —> slower growth

Question 10

Why does crowding out rarely happen

Answer 10

Governments with good credit rating has little problems with the sale of bonds
Financial institutions purchase bonds as they regard them as assets
High savings ratio means the any government debt will stake up these savings

Question 11

Define current expenditure

Answer 11

Government spending on the provision of goods and services that are used on a day to day basis
E.g. wages of hospital staff, energy, telephone bills

Question 12

Define current expenditure

Answer 12

Government spending on physical assets

E.g. roads, bridges, rail, school buildings