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Budget Deficits and the National Debt Objectives • Students will explain the importance of balancing the budget • Students will analyze how budget deficits add to the national debt • Students will summarize the problems caused by the national debt • Students will identify how a government can reduce budget deficits and the national debt Balancing the Budget • Balanced Budget o A budget in which revenues are equal to spending • Budget Surplus o A situation in which the government takes in more than it spends • Budget Deficit o A situation in which the government spends more than it takes in Balancing the Budget • Responding to budget deficits o Choices the government has • Creating money o Can result in hyperinflation – inflation that is out of control • Borrowing money o Government borrow money through the use of bonds • Treasury bills o A government bond that is repaid within three months to a year • Treasury notes o A government bond that is repaid within two to ten years • Treasury bonds o A government bond that can be issued for as long as thirty years The National Debt • National debt o All the money the government owes to bond holders • Difference between deficit and debt o Deficit - money borrowed for one year (difference between revenues and expenditures) o Debt – the sum of all government borrowing (all money owed) • Measuring the national debt o Not measured by economist in dollar terms, but rather in term of percentage of GDP The National Debt • Is the Debt a Problem o Problems of a national debt • Crowding-out effect o The loss of funds for private investments due to borrowing o Other view of a national debt • There are benefits of national borrowing o Produces a more productive economy which will outweigh the costs of interest of the debt Deficits, Surpluses, and the National Debt • Efforts to reduce deficits o Some have suggested that there should be a constitutional amendment that would require that the country has a balanced budget (Balanced Budget Amendment) • Already happens in some states • End-of-century surpluses o Country had a budget surplus at the end of the previous century (1990’s) • Return to deficits o At the beginning of this century • Terrorist attacks, etc.