Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 12, Problem 8P
Sub-part
A
To determine
the way in which the national debt is related to the government’s budget deficit. When the gross national debt is $3 trillion and the government’s budget deficit is $300 billion.
Concept Introduction:A budget is an estimation of revenue and expenses over a specified future period of time. A budget deficit occurs when expenses exceed revenue, and it is an indicator of financial health. To correct a budget deficit, a nation may need to cut back on certain expenditures, increase revenue-generating activities or employ a combination of the two.
Sub-Part
B
To determine
the way in which the national debt is related to the government’s budget deficit. When the gross national debt is $2.5 trillion and the government’s budget deficit is $100 billion.
Concept Introduction:A budget is an estimation of revenue and expenses over a specified future period of time. A budget deficit occurs when expenses exceed revenue, and it is an indicator of financial health. To correct a budget deficit, a nation may need to cut back on certain expenditures, increase revenue-generating activities or employ a combination of the two.
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(The National Debt) Try the following exercises to better understand
how the national debt is related to the government's budget deficit. a. Assume that the gross national debt initially is equal to $3 trillion and the federal government then runs a deficit of $300 billion:
i. What is the new level of gross national debt?
ii. If 100 percent of the deficit is financed by the sale of securities to federal agencies, what happens to the amount of debt held by the public? What happens to the level of gross debt?
iii. If GDP increased by 5 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?
b. Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion:
i. What is the new level of gross national debt?
ii. If 100 percent of this deficit is financed by the sale of securities to the public,…
(The National Debt) Try the following exercises to better understand how the national debt is related to the government’s budget deficit.
Assume that the gross national debt initially is equal to $3 trillion and the federal government then runs a deficit of $300 billion.
What is the new level of gross national debt?
If 100 percent of the deficit is financed by the sale of securities to federal agencies, what happens to the amount of debt held by the public? What happens to the level of gross debt?
If GDP increased by 5 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?
5. Concerns about the national debt
Which of the following concerns about the national debt are substantive? Check all that apply.
If the share of the public debt owned by foreigners increases as the debt rises, U.S. citizens will have to transfer more money abroad.
Reducing the size of a large national debt may necessitate higher tax rates. Higher tax rates reduce incentives to innovate, invest, and
work, potentially reducing economic growth.
Paying off the U.S. national debt will require future generations of Americans to decrease their purchases of goods and services by an
amount equal to the existing debt.
O Deficit spending always leads to lower levels of capital formation in the long run.
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- Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not.arrow_forwardWhen governments run budget deficits, how do they make up the differences between tax revenue and spending?arrow_forward5. Concerns about the national debt Which of the following concerns about the national debt are substantive? Check all that apply. U The large U.S. national debt is in danger of bankrupting the federal government. As government securities mature, portions of the national debt come due. When this occurs, the only way for the government to obtain the necessary funds is to raise taxes or cut expenditures. Paying off the U.S. national debt will require future generations of Americans to decrease their purchases of goods and services by an amount equal to the existing debt. Government's borrowing to refinance the debt may lead to higher interest rates. Higher interest rates reduce investment spending, leaving future generations with a smaller stock of capital goods.arrow_forward
- Answer part D) Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4 trillion worth of taxes. Instructions: Round your responses to one decimal place. a. What will be the government’s deficit? $____billion b. If the government finances the deficit by issuing bonds, what amount of bonds will it issue? $ ______ billion c. At a 3 percent rate of interest, how much interest will the government pay each year? $ ________ billion d. Add the interest payment to the government’s $5 trillion expenditures for the next year, and assume that tax revenues remain at $4 trillion. In the second year, compute the (i) Deficit. $ _________ billion (ii) Amount of new debt (bonds) issued to finance the deficit in the second year. $ ________ billion (iii) Total debt at the end of the second year. $ __________ billion (iv) Debt service requirement. $ _______billionarrow_forward(Crowding Out and Capital Formation) In earlier chapters, we’ve seen that the government can try to increase GDP in the short run by running a budget deficit. What are some long-term effects of deficit spending?arrow_forward6. Budgetbalances and the national debt The following table lists federal expenditures, revenues, and GDP for the U.S. economy during several years. Revenues Year (Billions of dollars) 1929 3.9 1948 1967 1986 2005 41.6 148.8 769.2 2,153.9 Expenditures (Billions of dollars) 3.1 29.8 157.5 990.4 2,472.2 GDP (Billions of dollars) 103.6 269.2 832.6 4462.8 12,421.9arrow_forward
- Question 31 What is the relationship between a budget deficit and the national debt? A budget deficit adds to the size of the national debt They are the same when talking about the government The national debt makes a budget deficit more likely There is no connection between themarrow_forward(The National Debt) Try the following exercises to better understand how the national debt is related to the government’s budget deficit. If GDP increased by 6 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?arrow_forward5. Budget deficit and surplus Aa Aa The following table lists federal expenditures, revenues, and GDP for the U.S. economy during several years. All numbers are in billions of dollars. Year Revenues Expenditures GDP 1998 1,722 1,653 8,747 2000 2,025 1,789 9,817 2002 1,853 2,011 10,470 2004 1,880 2,293 11,686 2006 2,407 2,655 13,178 Plot the data for revenues and expenditures as a percentage of GDP on the following graph, rounded to the nearest percent. Use the red points (cross symbol) for expenditures and the green points (triangle symbol) for revenues. Line segments will automatically connect the points. EXPENDITURES AND REVENUES (Percent of GDP) Expenditures 20 Revenues 15 10 1996 1998 2000 2002 2004 2006 2008 YEAR Help Clear All 25arrow_forward
- 4. The public debt - Ownership The following table contains approximate figures for gross domestic product (GDP) and the national debt in the United States for June 2007 and June 2011. The national debt represents the total amount of money owed by the federal government to holders of U.S. securities. All numbers are in trillions of dollars. June 2007 June 2011 GDP (Trillions of Dollars) 13.7 15.2 Total National Debt (Trillions of Dollars) 8.9 14.3 Source: "U.S. Treasury, Bureau of Economic Analysis." Debt Held by Federal Government and Federal Reserve (Trillions of Dollars) 4.7 4.6 Debt Held Outside Fed. Govt. and Fed. Reserve Foreign Ownership (External U.S. Ownership (External National Debt) National Debt) (Trillions of Dollars) (Trillions of Dollars) 2.2 4.5 2.0 In June 2007, the percentage of the U.S. national debt held by foreigners (external national debt) was 5.2 Net public debt is the portion of the national debt that is held outside the federal government and the Federal…arrow_forward9) Suppose that the government starts with a debt of $10 billion. Then in year 1 there is a deficit of $50 billion, in year 2 there is a deficit of $70 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion. What is the government debt at the end of year 4?arrow_forwardquestion:- Explain the difference between a budget deficit and the national debt. How are they related?arrow_forward
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