Budget Deficits & National Debt Flashcards
(28 cards)
What is the basic tool of fiscal policy?
The federal budget
What are the two parts of the budget?
- Revenue - taxes
- Expenditures - spending programs
Define a balanced budget.
When revenues and expenditures are equal
Is the federal budget usually balanced?
No, it almost never is balanced
What is a budget surplus?
A situation in which budget revenues exceed expenditures
What is a budget deficit?
A situation in which budget expenditures exceed revenues
What do deficits indicate about government revenue?
The government didn’t take in enough revenue to cover its expenses
How can the government respond to budget deficits?
- Creating money
- Borrowing money
What is one effect of creating money?
Increases the amount of money in circulation
What can happen when the economy reaches full employment?
Output can’t increase despite more dollars in circulation
What issue can arise from creating more money?
Inflation or hyperinflation
Define hyperinflation.
Very high inflation
How does the federal government usually respond to a deficit?
By borrowing money
How does the government typically borrow money?
By selling bonds
What is a savings bond?
A bond that allows people to loan the government money and earn interest
What are Treasury bills?
A government bond issued with a term of 30 years
What does federal borrowing enable the government to do?
Undertake more projects than it could otherwise afford
What is the national debt?
The total amount of money the federal government owes to bondholders
What happens to the national debt each year there is a budget deficit?
The national debt grows
Why are bonds issued by the U.S. government considered safe investments?
The U.S. government is viewed as stable and trustworthy
What is the difference between deficit and debt?
- Deficit: amount borrowed for one fiscal year
- Debt: sum of all government borrowing minus repaid amounts
How can the national debt be expressed for easier understanding?
As a percentage of GDP
When does debt as a % of GDP typically rise?
During wartime when government spending increases faster than taxation
What is the crowding-out effect?
The loss of funds for private investment caused by government borrowing
