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EC140 Chapter Notes - Chapter 31: Government Budget Balance, Budget Constraint, Government Debt

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School
WLU
Department
Economics
Course
EC140
Professor
Ken Jackson

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EC140 Full Course Notes
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The governments budget constraint: government expenditures must be financed by income or by borrowing, governments earn income through levying taxes, the government"s budget constraint is: Government expenditure = tax revenue + borrowing: government expenditure is divided into two categories: G + i x d = t + borrowing. (g + i x d) t = borrowing. Any excess of total government spending over net tax revenues must be financed by government borrowing. Primary budget deficit = total budget deficit debt service payments. (g + i x d t) i x d. G t: the primary budget surplus or deficit shows the extent to which current tax revenues can cover the government"s current program spending, it is equal to the overall budget deficit minus debt-service payments. The structural budget deficit and changes in fiscal policy: an expansionary change in fiscal policy, shifts the budget deficit function upward from b0 to.

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Related Questions

A recent report on GDP growth rates showed that the GDP of Dorada, a developed economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha Jude, both students of economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent times, leading to a decline in GDP. Tabitha however disagrees. According to her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in Dorada's GDP. Which of the following, if true, will strengthen Emily's claim that the high fiscal deficit is affecting the government's ability to spend?

A. The central government's grants-in-aid to the local governments increased by 7 percent.

B. A sizeable portion of the tax revenue generated in Dorada is being used to make interest payments on sovereign debt.

C. The President's economic advisory council is of the opinion that the fiscal deficit should not exceed 3 percent of the country's GDP.

D. Given that the government of Dorada has never defaulted on sovereign debt, it enjoys very high credit ratings.

E. The government of Dorada scaled up its defense expenditure by more than 50 percent in the last two years.

1. The government has a balanced budget when the economy is at full employment. When the economy weakens, tax revenue ________ and spending on transfers _________. This causes a ____________ ______________.

2. Social Security has revenues of $1.8 trillion and expenditures of $1.3 trillion. The nonsocial Security budget has revenue of $2.1 trillion and expenditures of $2.4 trillion. The official budget will report a _______________ (deficit/surplus) of $___________________. The national debt will ____________ (rise/ fall) by $______________.

Answer True or False for each of the following.

In recent years government debt grew much faster than GDP.

Conservative economists blame repealing Glass-Steagall for the financial crisis.

In the last few years, the US has run the largest nominal deficits in US history.

Foreigners own more of the national debt today than 40 years ago

The Great Recession results in part from rapidly rising oil prices.

Subprime mortgages are those made at interest rates below the prime rate.

Economists agree that de-regulation lay behind the financial crisis.

Credit deposit swaps are mortgage-based derivatives.

Social Security runs completely out of money and can’t pay benefits by 2018.

The national debt to GDP ratio in the U.S. has never been higher than right now.

Greece has a GDP of some 200 billion euros, with exports of about 40 billion euros and imports of about 50 billion euros. Assume net unilateral transfers are zero, and the statistical discrepancy in the balance of payments is zero.

Show your calculations and answers after each sub-part to this question:

a. What is Greece's expenditure on the sum of consumption (C), investment (I) and government purchases (G)?

b. What is Greece's current account balance?

c. What is Greece's current account balance as a percentage of GDP?

d. What is Greece's balance on the capital & financial account of the balance of payments?

e. Greece's government sector budget deficit this year is 2.0% of GDP. What is the balance of private sector saving and investment, as a percentage of GDP?

f. Last year Greece's foreign debt was 325 billion euros. Based on your answers to the above questions, what will Greece's foreign debt be this year?