Chapter 16 - Government Debt and Deficits Flashcards
How are the govt expenditures financed?
Income through tax revenue or borrowing
Define the primary budget deficit.
Primary budget deficit is the difference between the government’s overall budget deficit and its debt-service payments. It shows the extent to which current tax revenues can cover the govt current spending.
Which relationship is shown by the budget deficit function?
It plots the relationship of government’s budget deficit as a function of the level of real GDP.
For given government purchases and debt service payments, there is a ________relationship
between real GDP and the government budget deficit.
Negative
When real GDP equals potential GDP (Y=Y), what happens to cyclical and structural deficits?
What happens during recessionary gaps (Y<Y) and inflationary gaps (Y>Y*)
when Y=Y* : there is no cyclical deficit, if a deficit exists, its a structural one.
when Y<Y* : the actual budget deficit exceeds the structural budget deficit.
when Y>Y*: the actual budget deficit is less than the structural budget deficit.
If the real interest rate on government debt is approximately equal to the growth rate of real GDP, reductions in the debt-to-GDP ratio require the government to run _______
primary budget surpluses
What does crowding-out mean? And crowding in.
out: this happens when rising public sector spending drives down or even eliminates private sector spending.
Crowding-in: this happens when higher government spending leads to an increase in economic growth and therefore encourages firms to invest due to the presence of more profitable investment opportunities.
Do Deficits Crowd Out Private Activity?
Yes. An increase in the budget deficit is assumed to cause a reduction in the supply of national savings. A reduction in the supply of national savings will increase the equilibrium real interest rate and reduce the amount of investment in the economy.
In an open economy, the government budget deficit attracts foreign financial capital and appreciates the domestic currency. What is the long-run result of that?
A crowding out of net exports.
