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Chapter 15

introducing

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
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
Deficit Short Run
In the short run, if the economy is
below potential, deficits are good
because deficits increase
expenditures moving output closer
to potential
In the Long Run
Surpluses Long-Run

Long-run surpluses are good


because they provide saving for
investment
We Are Back To Trade Off

Short Run Long Run


Deficit Surplus
Good Good

Short Run or Long Run?


Who Makes Fiscal Policy?

The President and Congress make fiscal policy


This is complicated and can be time consuming,
especially when one political party controls
Congress while the president belongs to the other
party
No one seems to be in charge of making fiscal
policy

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 12-33
The Deficit Dilemma**

Deficits, Surpluses, and the Balanced Budget


When government spending is greater than
tax revenue, we have a federal budget
deficit
The government borrows to make up the
difference
Deficits are prescribed to fight recession

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 12-35
Deficits

Tax
Spending Revenue
The Deficit Dilemma

Deficits, Surpluses, and the Balanced


Budget
When the budget is in a surplus
position, tax revenue is greater than
government spending
Budget surpluses are prescribed to
fight inflation

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 12-36
Surplus

Tax
Spending Revenue
The Deficit Dilemma

Deficits, Surpluses, and the Balanced


Budget
We have a balanced budget when
government expenditures are equal
to tax revenue
Weve never had an exactly
balanced budget

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 12-37

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