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Transcript
Gov’t Policy
Macro Unit 5
Which is…
A. Debt/Deficit
debt
deficit
surplus
During a given time period, your
spending exceeds your earnings
During a given time period, your
earnings exceed your spending
Total amount owed at a specific
moment in time.
When the government is spending at a deficit,
pay for its spending.
it must find a way to ______
bonds
The U.S. finances its deficit by selling ________
securities
or ___________which
are basically promises to
re-pay money in the future.
When I buy this bond for
my daughter I am basically
__________
loaning money to the
government.
http://www.brillig.com/debt_clock?
http://www.publicdebt.treas.gov/opd/opdpenny.htm
USA Debt
Date
09/30/2008
09/30/2007
Dollar Amount
10,024,724,896,912.49
9,007,653,372,262.48
09/30/2006
09/30/2005
09/30/2004
8,506,973,899,215.23
09/30/2003
09/30/2002
09/30/2001
6,783,231,062,743.62
6,228,235,965,597.16
5,807,463,412,200.06
09/30/2000
5,674,178,209,886.86
http://www.treasurydirect.gov/
7,932,709,661,723.50
7,379,052,696,330.32
When looking at the debt burden of an
economy, economists look at the debt as a
GDP
percentage of ______.
In the early 2000’s the US debt as a percentage
59
of GDP was around _____%.
6 of 20
http://zfacts.com/p/318.html
What do you think happened to the US debt as a
percentage of GDP in 2004--2009?
Interest payments each year on the debt
2000
$361,997,734,302.36
1999
$353,511,471,722.87
1998
$363,823,722,920.26
1997
$355,795,834,214.66
1996
$343,955,076,695.15
1995
$332,413,555,030.62
What’s the part of debt
that hurts the most?
interest payment
1994 $296,277,764,246.26
1993
$292,502,219,484.25
1992
$292,361,073,070.74
1991 $286,021,921,181.04
1990
$264,852,544,615.90
1989
$240,863,231,535.71
http://www.publicdebt.treas.gov/opd/opdint.htm
To whom is our debt owed? Here is a pie
chart showing the makeup, or ownership, of
the National Debt as of December 1998.
So in many cases, to whom are we paying
ourselves
interest?
009 National Debt $11,009,248,260,083
Top 15 Holders of U.S. Gov't Bonds
Federal Reserve and
US Intragovernmental Holdings
$4,806,000,000,000
43.65%
Mutual Funds
$769,100,000,000
6.99%
China
$739,600,000,000
6.72%
Japan
$634,800,000,000
5.77%
State and Local Governments
$522,700,000,000
4.75%
Pension Funds
$456,400,000,000
4.15%
Other Investors
$413,200,000,000
3.75%
Oil Exporters
$186,300,000,000
1.69%
Caribbean Banking Centers
$176,600,000,000
1.60%
Brazil
$133,500,000,000
1.21%
2009 National Debt $11,009,248,260,083
Top 15 Holders of U.S. Gov't Bonds (con’t)
Insurance companies
$126,400,000,000
1.15%
United Kingdom
$124,200,000,000
1.13%
Russia
$119,600,000,000
1.09%
Depository Institutions
$107,300,000,000
0.97%
Luxembourg
$87,200,000,000
0.79%
85.41%
others
14.59%
100.00%
B. Income / SavingsBut the
Vicky works 30
hours this week
and gets paid $6
an hour.
government
has to take...
Government
takes out:
Federal Tax
State Tax
FICA
Medicare
What is left over is
called “Disposable
Income” = DY
She will make $180 this week.
This is called “personal income” often abbrev Y
What can a person
do with this Disposable
Income?
C
S
+
Most individuals do a mixture of both C and S.
What is the formula for income?
Y= C+ S
12 of 20
If individuals as an
aggregate increase their
savings relative to their
AD
consumption, _____
shifts to the _________.
left
price
level
economy
LRAS
SRAS
AD2
Y2
Y1
AD1
Q = Real
GDP = Y
The opposite is also true. If individuals as an
aggregate increase their consumption relative
AD shifts to the ________.
right
to their savings, ____

As a result PL _____,
unemployment ____,

output _____

C. Types of Policies
We’ve learned that .....
we want the economy performing at equilibrium at
full _____________
employment
_____
output & that more is better so
we want growth.
2 types of policies:
demand side policies – seek to improve the economy
AD curve towards ______________
equilibrium
by shifting the _____
-- monetary & fiscal policy
supply side policies – seek to improve the economy by
LRAS curve out – (1) tax subsidies for
shifting the _______
investment, (2) encourage R&D, (3) encourage trade
D. Problems with Policies
Fiscal & Monetary Policy
Potential problems if the gov’t under takes
expansionary or contractionary policies:
problem #1 -- expansionary policy may
cause inflation
primary theories as to the cause of inflation
causes of inflation
(1) quantity theory of money
a rise in the money supply causes inflation -equation of exchange:
M ___
V = ___
P ___
Q
___
where....
velocity of money
V = ____________
quantity sold /
Q = ____________
output
since V constant and Q independent
MVPQ
money supply
M = ___________
price level
P = ___________
causes of inflation
(2) demand-pull inflation
when economy is above potential output, shortages of
goods & workers, firms will raise _________
and
prices
salary demands.
workers will raise _________
(3) cost-push inflation
the cost of factors of _____________
production rise so that
businesses must raise their _________
prices
Fiscal & Monetary Policy
problem #2 -- lag time
inside lag time – time it takes gov’t to 1st data
realize there’s a
collect _______;
2nd - ________
decide what policy to apply;
problem; 3rd - ________
implement the policy.
and 4th - ___________
economy
outside lag time – time it takes the ___________
to respond to new policy
the inside lag time is greater for monetary
....or....fiscal policy?
18 of 20
Fiscal & Monetary Policy
problem #3 -- crowding out
Let’s say the economy is in a recession and at
the same time is running a deficit – that means
spending more than it is
for that year it is __________
bringing
in
_____________
To get out of the recession the government
G so it can shift ____
AD to the
wants to increase ___
right. But what’s the problem with increasing
G?
problem #3 -- crowding out
This is what we call deficit spending – the gov’t
is spending more money than it’s bringing in.
sell
pay for this spending, gov’t must _____
To ________
bonds so that it brings money in  the gov’t
must make them attractive with a relatively
interest rate
higher ________
_____ which tends to drive up
i in the economy.
Look at some overheads to
graphically show crowding out