Government

Spending and
Its Financing
Instructor: Dr. Hira Mujahid
Objectives

1 2 3

Use the measures • Click on the "PowerPoint" button Describe how

of government outlays
and taxes to measure
government surpluses and
deficits
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17.
government spending and
taxing decisions affect the
macroeconomy
Objectives

4 5

Discuss the economic Explain the link between

effects of government
deficits and debt. deficits and inflation. .
The Government Budget
 Government purchases
government expenditures on currently produced
goods and services, including capital goods

Government Transfer payments (TR)

payments made to individuals for which the government
Outlays does not receive current goods or services in exchange.

Net interest payments (INT)

the interest paid to the holders of government
bonds less the interest received by the
government
deficit = outlays - tax revenues
= (government purchases + transfers + net interest) - tax revenues
= (G + TR + INT) - T.
Government deficits and debt.
The government debt (a stock variable) is the total value of government
bonds outstanding at any particular time

We can express the relationship between government debt and the budget deficit by
ΔB = nominal government budget deficit,

where ΔB is the change in the nominal value of government bonds outstanding

The Debt -GDP Ratio
which in words means the change in the ratio of
government debt to GDP =
deficit/GDP minus (debt/GDP times the growth rate of
nominal GDP).
Deficits and Inflation.

ΔB, which can be broken into additional government debt

held by the public, ΔBp, and by the central
bank, ΔBcb.
The increase in government debt held by the central bank in
turn equals the increase in the monetary base, ΔBASE.
 Real Seignorage Collection and Inflation

Real seignorage revenue, R, is the real value of the newly created

money, which equals nominal seignorage revenue, ΔM, divided by
the price level, P.