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Chapter 14: Q. 14.3LO (page 303)

Analyze the macroeconomic effects of government budget deficits.

Short Answer

Expert verified
  • Crowding Out Effect.
  • Increased Debt.
  • Higher Interest Rates.
  • Higher Interest Payments.
  • Short-term Economic process.

Step by step solution

01

Budget deficits.

Faster taxation, lower unemployment rates, and increased economic process lessen the necessity for government-funded programmes like unemployment insurance and Advantage, hence budget deficits as a proportion of GDP may decrease in times of economic boom.

02

Effects of budget deficits.

When the deficit grows because of a rise in government spending or a decrease in income, the Treasury must issue more bonds. This lowers the bond price and raises the rate.

  • Increased Debt.
  • Higher Interest Rates.
  • Higher Interest Payments.
  • Crowding Out Effect.
  • Economic Growth within the Short Term.

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Most popular questions from this chapter

Suppose that the economy is experiencing the short-run equilibrium position depicted at point Ain the diagram below. Then the government raises its spending and thereby runs a budget deficit in an effort to boost equilibrium real GDP to its long-run equilibrium level of $18trillion (in base-year dollars). Explain the effects of an increase in the government deficit on equilibrium real GDP and the equilibrium price level. In addition, given that many taxes and government benefits vary with real GDP, discuss what change we might expect to see in the budget deficit as a result of the effects on equilibrium real GDP.

Suppose that the Office of Management and Budget provides the estimates of federal budget receipts, federal budget spending, and GDP shown below, all expressed in billions of dollars. Calculate the implied estimates of the federal budget deficit as a percentage of GDP for each year.

To which key set of expenditures do you suppose that "other things being equal" definitely applies in the government's projections displayed in panel (b) of Figure 14-6? (Hint: Which types of expenses does the government often refer to as "non controllable"?)

The long-run effect of higher government budget deficits on the equilibrium annual flow of real GDP is zero. Who, therefore, benefits in the long run from higher government deficits?

Take a look at Figure 14-1. During the brief green-shaded intervals, is the amount of the U.S. net public debt more likely to be increasing or decreasing? Explain your reasoning.
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