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Chapter 21
Financial Effects of
the Government
and Foreign Sectors
©2000 South-Western College Publishing
Fiscal Policy
Government spending and
taxing decisions to speed up
or slow down the level of
economic activity
2
Aggregate Demand
The total quantity of final goods
and services that will be
demanded at various prices,
including
•consumption
•investment
•government purchases of goods
and services
3
Aggregate Supply
The total quantity of final
goods and services that will be
supplied at various prices
4
Public Debt
The sum of all past
government deficits less past
surpluses
5
Government Outlays –
Government Receipts = New Borrowing
= Net New Debt Issued
by the Treasury (bills,
notes, and bonds)
= Net Government
Demand for Loanable
Funds
( Eq.21.1)
6
Rolled Over means...
Borrowing to pay off
maturing debt
7
Refunding
The refinancing of past
government debt that is
maturing
8
The Difference Between Federal Outlays and
Federal Receipts (billions)
Year
1960
1965
1970
1975
1980
1985
1990
1995
1996
1997
1998
Receipts
$92.5
116.18
192.8
279.1
517.1
734.1
1,031.3
1,463.2
1,587.6
1,723.4
1,721.8
Outlays
$92.2
118.2
195.6
332.3
590.9
946.4
1,252.7
1,637.1
1,698.1
1,752.2
1,652.5
+ or $.3
-1.4
-2.8
-53.20
-73.8
-212.3
-221.4
-174.4
-110.4
-28.8
48.9*
9
Exhibit 21 -1
* First Quarter only
1500
1000
Billions of dollars
The Difference Between Federal Outlays & Receipts
2000
Receipts
Outlays
500
1970 1975 1980 1985 1990 1995 1998
10
Exhibit 21 -2
Regularized
The advanced
announcements of Treasury
intentions to borrow at
standard intervals
11
Federal Outlays & Receipts as a Percentage of GDP
Year
1960
1965
1970
1975
1980
1985
1990
1995
1996
1997
1998
Receipts
18.3%
7.4
19.6
18.5
19.6
18.5
18.8
20.1
20.7
21.3
19.8
Outlays Difference
18.3%
0%
17.6
-.2
19.9
-.3
22.0
-3.5
22.3
-2.7
23.9
-5.4
22.9
-4.1
22.5
-2.4
22.2
-1.5
21.7
-.4
19.0
.8*
12
Federal Outlays & Receipts as a Share of GDP
24%
22%
20%
18%
16%
Outlays
Receipts
0%
1970 1975 1980 1985 1990 1995 1998
13
Exhibit 21 - 4
To whom the Federal Debt is Owed,
as of June 30, 1998
Domestic Investors
U.S. Government Agencies
Foreign Investors
Federal Reserve Banks
Total National Debt
Exhibit 21 -5
billions
$ 2,068
1,827
1,276
472
$ 5,643
%
37%
32
23
8
100%
14
Crowding Out
The reduction in private
borrowing and spending due to
higher interest rates that result
from government deficit
financing
15
The Effect of a Rise in Government Borrowing
Interest
Rate (%)
S
B
8
6
A
D'D'
DD
$500
$530
$550
Loanable Funds (billions)
Exhibit 21 - 6
16
The Effect of a Reduction in Government Borrowing
S
Interest
Rate (%)
6
4
A
B
DD
D'D'
$450
$480
$500
Loanable Funds (billions)
Exhibit 21 - 7
17
Sources of Funds
Uses of Funds
Tax Receipts +
Borrowing
=
Government spending on goods
and services
+
Government spending on transfer
payments
+
Interest payments on the public debt
+
Changes in financial assets held
(Eq. 21.2)
18
Sources of Funds
Tax Receipts
Uses of Funds
+
Net Borrowing
=
Government spending on goods
and services
+
Government spending on transfer
payments
+
Interest payments on the public
debt
(Eq. 21.3)
19
Monetized
When the Fed purchases
newly issued Treasury
securities, that credits the
Treasury’s deposit account
20
15.0
Exports and Imports Relative to Gross
Domestic Product
Percent of GDP
12.0
9.0
Exports
6.0
Imports
3.0
1970 1975 1980 1985 1990 1995 1998
Exhibit 21 -8
Year
21
Net Capital Inflow occurs...
…when the purchases of U.S.
financial claims by foreigners
exceed purchases of foreign
financial claims by U.S.
entities
22
Net Capital Outflow occurs...
…when the purchases of
foreign financial claims by
U.S. entities exceed the
purchases of U.S. financial
claims by foreigners
23
Capital Flows Relative to GDP
Capital Flows/GDP( %)
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
24
Exhibit 21 - 9
1970
1975
1980
1985
1990
1995
1998
Twin Deficits
During the 1980’s,
•the high trade deficit and
•the high government deficit
25
Capital Flows Relative to GDP
Capital Flows/GDP( %)
50
0
Trade Balance
-50
-100
-150
-200
-250
Federal Government Balance
-300
26
Exhibit 21 - 10
1970
1975
1980
1985
1990
1995
1998
Sources Foreign Exchange Uses Foreign Exchange
Foreign purchases of
U.S. goods and services
U.S. purchases of
foreign goods & services
+
+
Net transfers from
foreigners
+
Net foreign purchases
U.S. financial assets
(Eq. 21.4)
Net transfers to
=
foreigners
+
Net U.S. purchases of
foreign financial assets
27