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Chapter 15 - Deficits and debt. After reading this chapter, you should be able to: Define the terms deficit, surplus, and debt and distinguish between a cyclical deficit and a structural deficit; differentiate between real and nominal deficits and surpluses; explain why the debt needs to be judged relative to assets; describe the historical record for the U.S. deficit and debt. | Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse. ―Franklin D. Roosevelt Deficits and Debt Chapter Goals Define the terms deficit, surplus, and debt and distinguish between a cyclical deficit and a structural deficit Differentiate between real and nominal deficits and surpluses Explain why the debt needs to be judged relative to assets Describe the historical record for the U.S. deficit and debt 2 Defining Deficits and Surpluses A deficit is a shortfall of revenues under payments A surplus is an excess of revenues over payments In the short run, if the economy is below potential, deficits are good because deficits increase expenditures moving output closer to potential Long-run surpluses are good because they provide saving for investment 3 Financing the Deficit The government finances its deficits by selling bonds to private individuals and to the central bank Bonds are promises | Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse. ―Franklin D. Roosevelt Deficits and Debt Chapter Goals Define the terms deficit, surplus, and debt and distinguish between a cyclical deficit and a structural deficit Differentiate between real and nominal deficits and surpluses Explain why the debt needs to be judged relative to assets Describe the historical record for the U.S. deficit and debt 2 Defining Deficits and Surpluses A deficit is a shortfall of revenues under payments A surplus is an excess of revenues over payments In the short run, if the economy is below potential, deficits are good because deficits increase expenditures moving output closer to potential Long-run surpluses are good because they provide saving for investment 3 Financing the Deficit The government finances its deficits by selling bonds to private individuals and to the central bank Bonds are promises to pay back the money in the future The central bank can print an unlimited amount of money to buy bonds, but printing too much money can cause serious inflation 4 Arbitrariness in Defining Surpluses and Deficits Whether a nation has a deficit or surplus depends on what is included as revenues and expenditures There are many ways to measure expenditures and receipts, so there are many ways to measure deficits and surpluses Deficit and surplus figures are summary measures of the financial health of the economy To understand the summary, you must understand the methods that were used to calculate it 5 Structural and Cyclical Deficits and Surpluses Many government revenues and expenditures depend on the level of income in the economy Structural deficit is the part of the budget deficit that would exist even if the economy were at its potential level of output Cyclical deficit is the part of the deficit that exists because the economy is operating below its potential level of output 6 .
