Chapter 23: Federal Deficits and the National Debt

What is the purpose of this chapter? To take a closer look at the actual budgetary process that creates and finances our national debt What are the four stages of the Budget Process? Agency budget proposals Presidential budget submission First budget resolution Second budget resolution

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Chapter 23 Federal Deficits and the National Debt Key Concepts Summary Practice Quiz Internet Exercises1In this chapter, you will learn to solve these economic puzzles:Can Uncle Sam go bankrupt?How does the national debt of the United States compare to other countries?Are we passing the debt burden to our children?Who owns the national debt?Are there any advantages to a national debt?2What is the purpose of this chapter?To take a closer look at the actual budgetary process that creates and finances our national debt3What are the four stages of the Budget Process?Agency budget proposalsPresidential budget submissionFirst budget resolutionSecond budget resolution4What is the Federal Fiscal Year?October 1 through September 305What is the Federal Deficit?How much money the government borrows in any given fiscal year6What is the National Debt?The total amount owed by the federal government to owners of government securities7How does the U.S. Treasury borrow money?By selling Treasury bills, notes, and bonds, promising to make specified interest payments and to repay the loaned funds on a given date860$200YearFederal Expenditures and Tax RevenuesBillions of dollars$400$1,600$600$800$1,000$1,200$1,40065707580859095ExpendituresRevenues00917YearPercentage of GDP182419202122231985199019952000Federal Expenditures, Revenues, and Deficits as a Percentage of GDPFederal Deficit1065$-350$-3000$-250$-200$-150$-100$-507075808590Deficit95Federal Budget Surpluses and DeficitsBillions of dollars60Surplus$+500011What has been done to curb the National Debt?The Clinton planLine-item vetoDebt ceiling12What was the keystone of the 1993 Clinton Deficit Reduction Plan for Taxes?Raised the highest marginal tax rate from 31% to 36%Increased tax on gasoline by 4.3 cents per gallon13What was the keystone of the 1993 Clinton Deficit Reduction Plan for Spending?Reduced military spending and and cut some entitlements, including Medicare, Medicaid, and food stamps14What is a Debt Ceiling?The legislated legal limit on the national debt15What usually happens when the Debt pushes against the Ceiling?Congress raises the ceiling to accommodate the budget deficit1630405060708090Year$1$2$3$4$5$6National debtThe National Debt00Trillions of dollars1730405060708090Year20406080100National debt/GDP120140150Percentage of GDPWorld War IIThe National Debt as a Percentage of GDP0018What is the Internal National Debt?The portion of the national debt owed to a nation’s own citizens19What is the External National Debt?The portion of the national debt owed to foreign citizens202140506070809000.05%1.0%1.5%2.0%2.5%3.0%3.5%4.0%Federal Net Interest as a Percentage of GDPYearPercentage of GDP2223What is the Crowding-out Effect?When federal government borrowing increases interest rates, the result is lower consumption and investments24Can the Government go Bankrupt?Yes, it’s possibleNo, the debt need never be paid off25Are we passing the Debt Burden to our Children?Yes, especially if it continues to increaseNo, not as long as the debt is internally owned26Does Government Borrowing Crowd Out Private-sector Spending?Yes, the more the government borrows the less loanable funds for everyone elseNo, especially if it occurs during economic downturns27200150502468AD1ASAD`210012AD2E2E1E`2Full EmploymentComplete (AD1), Partial (AD`2), and Zero (AD2) Crowding Out28Key Concepts29Key ConceptsWhat is the Federal Deficit?What is the National Debt?How does the U.S. Treasury borrow money?What has been done to curb the National Debt?What is a Debt Ceiling?30Key Concepts cont.What is the Internal National Debt?What is the External National Debt?What is the Crowding-out Effect?Can the Government go Bankrupt?Are we passing the Debt Burden to our Children?Does Government Borrowing Crowd Out Private-sector Spending?31Summary32 The national debt is the dollar amount that the federal government owes holders of government securities. It is the cumulative sum of past deficits. The U.S. Treasury issues government securities to finance the deficits. The debt has more than tripled since 1980. The debt ceiling is a method to restrict the national debt. 3330405060708090Year$1$2$3$4$5$6National debtThe National Debt00Trillions of dollars34 Internal national debt is the percentage of the national debt a nation owes to its own citizens. In 1998, abut 83% of the national debt was internally held by individuals, banks, corporations, insurance companies, and government entities. The “we owe it to ourselves” argument over the debt is the U.S. citizens own the bulk of the national debt. 35 External debt is a burden because it is the portion of the national debt a nation owes to foreigners. The interest paid on external debt transfers purchasing power to other nations. In 1998, approximately 17% of the national debt was external. 3637 The crowding-out effect is a burden of the national debt that occurs when the government borrows to finance its deficit, causing the interest rate to rise. As the interest rate rises, consumption and business investment fall.The burden of debt debate involves controversial questions:38Can Uncle Sam GO Bankrupt?The national debt is a lower percentage of GDP today than at the end of World War II. The U.S. government will not go bankrupt because it never has to pay off its debt. When government securities mature, the U.S. Treasury can refinance or roll over the debt by issuing new securities. 39 Are We Passing the Debt Burden to Our Children? NOOne side of this argument is that the debt is mostly internal, so financing a deficit only involves exchanging old bonds for new bonds among U.S. citizens. The burden of the debt falls only on the current generation when the trade-off between public-sector goods and private sector goods along the production possibilities curve occurs. 40 Are We Passing the Debt Burden to Our Children? YESThe sizeable external debt transfers purchasing power to foreigners. 41 Does Government Borrowing Crowd Out Private Sector Spending? Keynesian theory assumes zero crowding out when the federal government increases spending in order to shift the aggregate demand curve rightward. If crowding out occurs, reduced private spending offsets the multiplier effect of increased government spending. As a result, the expected magnitude of the rightward shift in the aggregate demand curve is partially or completely offset. 42 Chapter 23 Quiz©2000 South-Western College Publishing431. During the late 1990’s, federal government budget deficits a. were completely removed.b. dropped significantly from a high of $300 billion.c. remained fairly stable at about $150 billion per year.d. exceeded $200 billion in each year.B. 4465$-350$-3000$-250$-200$-150$-100$-507075808590Deficit95Federal Budget Surpluses and DeficitsBillions of dollars60Surplus$+5000452. The federal government finances a budget deficit by a. taxing businesses and households.b. selling Treasury securities.c. printing more money.d. reducing its purchases of goods and services.B. The U.S. Treasury borrows by selling Treasury bill (T-bills), notes, and bonds promising to make specified interest and repay the loan on a given date.463. In 1998, the national debt was approximately a. $60 billion.b. $600 billion.c. $6 trillion.d. $5 trillion.C.4730405060708090Year$1$2$3$4$5$6National debtThe National Debt00Trillions of dollars484. The national debt a. doubled between 1950 and 1980, and by 1990, it was over four times its size in 1980.b. doubled between 1950 and 1980 and doubled again between 1980 and 1990.c. stayed at approximately the same amount between 1950 and 1980 and doubled between 1980 and 1990.d. was four times larger in 1980 than it was in 1950 and then doubled between 1975 and 1990.A. 4930405060708090Year$1$2$3$4$5$6National debtThe National Debt00Trillions of dollars505. Which of the following countries has the smallest national debt as a percentage of GDP?a. Italy.b. Canada.c. United Kingdom.d. Japan.e. France.C. 51526. Which of the following is false?a. The national debt’s size decreased steadily after World War II until 1980 and then increased sharply each year.b. The national debt increases in size whenever the federal government has a budget surplus.c. The national debt is currently is about the same size as it was during World War II.d. All of the above are false.D.537. In 1998, how much of the U.S. national debt was owed to foreigners?a. About 2.5%.b. About 17%.c. About 31%.d. About 59%.B.548. Which of the following owns a portion of the national debt? a. Federal, state, and local governments.b. Private U.S. citizens.c. Banks.d. Foreigners.e. All of the above.E. Treasury bills are widely held throughout the public and private sectors both domestically and overseas.559. The portion of the U.S. national debt held by foreigners a. represents a burden because it transfers purchasing power from U.S. taxpayers to other countries.b. is an accounting entry that represents no real burden.c. decreased as a proportion of the total debt during the 1980’s.d. has been constant for many decades.A. Approximately 17 percent of total U.S. debt is external debt.565710. Which of the following statements about crowding out is true? a. It is caused by a budget surplus.b. It is not caused by a budget deficit.c. It cannot completely offset the multiplier effect of deficit government spending.d. It affects interest rates and, in turn, consumption and investment spending.D. The crowding-out effect is a reduction in private spending caused by federal deficits financed by U.S. Treasury borrowing. 5811. Which of the following statements about crowding out is true? a. It can completely offset the multiplier.b. It is caused by a budget deficit.c. It is not caused by a budget surplus.d. All of the above are true.D. If crowding out occurs, reduced private spending offsets the multiplier effect of increased government spending. The debt is a summation of each years deficits and therefore effects consumption and investments. No crowding out occurs with budget surpluses because the government is not competing with consumers and investors for available funds. 59Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises60END61