Chapter 23Federal Deficits and the National Debt • Key Concepts • Summary • Practice Quiz • Internet Exercises            ...
In this chapter, you will  learn to solve these   economic puzzles:  How does the anynational      Arepassing thego       ...
What is the purpose   of this chapter?To take a closer look at the actual budgetary process that creates and finances our ...
What are the four stagesof the Budget Process?• Agency budget proposals• Presidential budget  submission• First budget res...
What is the Federal  Fiscal Year? October 1 through  September 30                5
What is the    Federal Deficit?How much money the government borrows in any given fiscal year                  6
What is the    National Debt?The total amount owed by the federal government to owners of government securities           ...
How does the U.S.Treasury borrow money?By selling Treasury bills, notes, and bonds, promising to make specified interest p...
Federal Expenditures$1,600                          and Tax Revenues$1,400$1,200   Billions of dollars   Expenditures$1,00...
Federal Expenditures, Revenues, and                    24     Deficits as a Percentage of GDP                    23Percent...
$+50                                             Surplus     0                                              Deficit  $-50 ...
What has been done tocurb the National Debt?    • The Clinton plan    • Line-item veto    • Debt ceiling                  ...
What was the keystone of the 1993 Clinton DeficitReduction Plan for Taxes? • Raised the highest   marginal tax rate from  ...
What was the keystone  of the 1993 Clinton Deficit Reduction Plan     for Spending?Reduced military spending and and cut s...
What is a Debt Ceiling? The legislated legal limit  on the national debt                      15
What usually happenswhen the Debt pushes against the Ceiling?Congress raises the ceiling to accommodate the budget deficit...
$6                               The National Debt$5   Trillions of dollars$4$3                                     Nation...
The National Debt as150                                       a Percentage of GDP140    Percentage of GDP   World War II12...
What is the Internal National Debt?The portion of the national debt owed to a nation’s own citizens                   19
What is the External National Debt? The portion of the  national debt owed  to foreign citizens                  20
An International Comparison       of National Debt Ratios as a percentage of120%                      GDP, 1998100%       ...
Federal Net Interest as a4.0%                                   Percentage of GDP3.5%   Percentage of GDP3.0%2.5%2.0%1.5%1...
Ownership of the National Debt            1998   17%                            Public Sector                        37%  ...
What is theCrowding-out Effect?When federal government borrowing increases interest rates, the result is lower consumption...
Can the Government   go Bankrupt?• Yes, it’s possible• No, the debt need never  be paid off                   25
Are we passing the DebtBurden to our Children?Yes, especially if it continues to increaseNo, not as long as the debt is in...
Does Government Borrowing Crowd OutPrivate-sector Spending?Yes, the more the government borrows the less loanable funds fo...
Complete (AD1), Partial (AD`2),and Zero (AD2) Crowding Out       AS200                                       E2150        ...
Key Concepts           29
Key Concepts•   What is the Federal Deficit?•   What is the National Debt?•   How does the U.S. Treasury borrow money?•   ...
Key Concepts cont.•   What is the Internal National Debt?•   What is the External National Debt?•   What is the Crowding-o...
Summary          32
The national debt is the dollaramount that the federal governmentowes holders of governmentsecurities. It is the cumulativ...
$6                               The National Debt$5   Trillions of dollars$4$3                                     Nation...
Internal national debt is thepercentage of the national debt anation owes to its own citizens. In1998, abut 83% of the nat...
External debt is a burdenbecause it is the portion of thenational debt a nation owes toforeigners. The interest paid onext...
Ownership of the National Debt            1998   17%                            Public Sector                        37%  ...
The crowding-out effect is aburden of the national debt thatoccurs when the governmentborrows to finance its deficit,causi...
Can Uncle Sam GO Bankrupt?The national debt is a lowerpercentage of GDP today than at theend of World War II. The U.S.gove...
Are We Passing the Debt Burden toOur Children? NOOne side of this argument is that thedebt is mostly internal, so financin...
Are We Passing the Debt Burdento Our Children? YESThe sizeable external debt transferspurchasing power to foreigners.     ...
Does Government Borrowing CrowdOut Private Sector Spending?Keynesian theory assumes zero crowdingout when the federal gove...
Chapter 23 Quiz   ©2000 South-Western College Publishing                                            43
1. During the late 1990’s, federal government  budget deficits   a. were completely removed.   b. dropped significantly fr...
$+50                                             Surplus     0                                              Deficit  $-50 ...
2. The federal government finances a budget  deficit by   a. taxing businesses and households.   b. selling Treasury secur...
3. In 1998, the national debt was approximately  a. $60 billion.  b. $600 billion.  c. $6 trillion.  d. $5 trillion.     C...
$6                               The National Debt$5   Trillions of dollars$4$3                                     Nation...
4. The national debt   a. doubled between 1950 and 1980, and by     1990, it was over four times its size in 1980.   b. do...
$6                               The National Debt$5     Trillions of dollars$4$3                                 National...
5. Which of the following countries has the  smallest national debt as a percentage of GDP?   a. Italy.   b. Canada.   c. ...
An International Comparison       of National Debt Ratios as a percentage of120%                      GDP, 1998100%       ...
6. Which of the following is false?   a. The national debt’s size decreased     steadily after World War II until 1980    ...
7. In 1998, how much of the U.S. national debt  was owed to foreigners?   a. About 2.5%.   b. About 17%.   c. About 31%.  ...
8. Which of the following owns a portion of  the national debt?   a. Federal, state, and local governments.   b. Private U...
9. The portion of the U.S. national debt held by  foreigners   a. represents a burden because it transfers     purchasing ...
Ownership of the National Debt            1998   17%                            Public Sector                        37%  ...
10. Which of the following statements about  crowding out is true?   a. It is caused by a budget surplus.   b. It is not c...
11. Which of the following statements about   crowding out is true?    a. It can completely offset the multiplier.    b. I...
Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises           ...
END      61
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09 federal deficits and the national debt

  1. 1. Chapter 23Federal Deficits and the National Debt • Key Concepts • Summary • Practice Quiz • Internet Exercises 1
  2. 2. In this chapter, you will learn to solve these economic puzzles: How does the anynational Arepassing thego thereSam debt Aredebt of the United we owns Can Uncle the Who advantageschildren? burdenbankrupt? to a to ourdebt? States compare to other national debt? national countries? 2
  3. 3. What is the purpose of this chapter?To take a closer look at the actual budgetary process that creates and finances our national debt 3
  4. 4. What are the four stagesof the Budget Process?• Agency budget proposals• Presidential budget submission• First budget resolution• Second budget resolution 4
  5. 5. What is the Federal Fiscal Year? October 1 through September 30 5
  6. 6. What is the Federal Deficit?How much money the government borrows in any given fiscal year 6
  7. 7. What is the National Debt?The total amount owed by the federal government to owners of government securities 7
  8. 8. How 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 date 8
  9. 9. Federal Expenditures$1,600 and Tax Revenues$1,400$1,200 Billions of dollars Expenditures$1,000 $800 $600 $400 Revenues $200 Year 60 65 70 75 80 85 90 95 00 9
  10. 10. Federal Expenditures, Revenues, and 24 Deficits as a Percentage of GDP 23Percentage of GDP 22 21 20 Federal 19 Deficit 18 17 Year 1985 1990 1995 2000 10
  11. 11. $+50 Surplus 0 Deficit $-50 Billions of dollars$-100$-150$-200$-250$-300 Federal Budget Surpluses and Deficits$-350 60 65 70 75 80 85 90 95 00 11
  12. 12. What has been done tocurb the National Debt? • The Clinton plan • Line-item veto • Debt ceiling 12
  13. 13. What was the keystone of the 1993 Clinton DeficitReduction Plan for Taxes? • Raised the highest marginal tax rate from 31% to 36% • Increased tax on gasoline by 4.3 cents per gallon 13
  14. 14. What 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 stamps 14
  15. 15. What is a Debt Ceiling? The legislated legal limit on the national debt 15
  16. 16. What usually happenswhen the Debt pushes against the Ceiling?Congress raises the ceiling to accommodate the budget deficit 16
  17. 17. $6 The National Debt$5 Trillions of dollars$4$3 National debt$2$1 Year 30 40 50 60 70 80 90 00 17
  18. 18. The National Debt as150 a Percentage of GDP140 Percentage of GDP World War II120100 National debt/GDP 80 60 40 20 Year 30 40 50 60 70 80 90 00 18
  19. 19. What is the Internal National Debt?The portion of the national debt owed to a nation’s own citizens 19
  20. 20. What is the External National Debt? The portion of the national debt owed to foreign citizens 20
  21. 21. An International Comparison of National Debt Ratios as a percentage of120% GDP, 1998100% Italy80% Japan Canada60% France U.S.40% Germany U.K.20% 0% 21
  22. 22. Federal Net Interest as a4.0% Percentage of GDP3.5% Percentage of GDP3.0%2.5%2.0%1.5%1.0%.05% Year 40 50 60 70 80 90 00 22
  23. 23. Ownership of the National Debt 1998 17% Public Sector 37% Private Sector 46% Foreigners 23
  24. 24. What is theCrowding-out Effect?When federal government borrowing increases interest rates, the result is lower consumption and investments 24
  25. 25. Can the Government go Bankrupt?• Yes, it’s possible• No, the debt need never be paid off 25
  26. 26. Are we passing the DebtBurden to our Children?Yes, especially if it continues to increaseNo, not as long as the debt is internally owned 26
  27. 27. Does Government Borrowing Crowd OutPrivate-sector Spending?Yes, the more the government borrows the less loanable funds for everyone elseNo, especially if it occurs during economic downturns 27
  28. 28. Complete (AD1), Partial (AD`2),and Zero (AD2) Crowding Out AS200 E2150 E`2 E1 AD2100 AD`2 AD150 Full Employment 2 4 6 8 12 28
  29. 29. Key Concepts 29
  30. 30. Key Concepts• What 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? 30
  31. 31. Key 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 Childre• Does Government Borrowing Crowd Out Priva 31
  32. 32. Summary 32
  33. 33. The national debt is the dollaramount that the federal governmentowes holders of governmentsecurities. It is the cumulative sumof past deficits. The U.S. Treasuryissues government securities tofinance the deficits. The debt hasmore than tripled since 1980. Thedebt ceiling is a method to restrictthe national debt. 33
  34. 34. $6 The National Debt$5 Trillions of dollars$4$3 National debt$2$1 Year 30 40 50 60 70 80 90 00 34
  35. 35. Internal national debt is thepercentage of the national debt anation owes to its own citizens. In1998, abut 83% of the nationaldebt was internally held byindividuals, banks, corporations,insurance companies, andgovernment entities. The “we oweit to ourselves” argument overthe debt is the U.S. citizens ownthe bulk of the national debt. 35
  36. 36. External debt is a burdenbecause it is the portion of thenational debt a nation owes toforeigners. The interest paid onexternal debt transfers purchasingpower to other nations. In 1998,approximately 17% of the nationaldebt was external. 36
  37. 37. Ownership of the National Debt 1998 17% Public Sector 37% Private Sector 46% Foreigners 37
  38. 38. The crowding-out effect is aburden of the national debt thatoccurs when the governmentborrows to finance its deficit,causing the interest rate to rise. Asthe interest rate rises, consumptionand business investment fall.The burden of debt debate involvescontroversial questions: 38
  39. 39. Can Uncle Sam GO Bankrupt?The national debt is a lowerpercentage of GDP today than at theend of World War II. The U.S.government will not go bankruptbecause it never has to pay off itsdebt. When government securitiesmature, the U.S. Treasury canrefinance or roll over the debt byissuing new securities. 39
  40. 40. Are We Passing the Debt Burden toOur Children? NOOne side of this argument is that thedebt is mostly internal, so financing adeficit only involves exchanging oldbonds for new bonds among U.S.citizens. The burden of the debt fallsonly on the current generation when thetrade-off between public-sector goodsand private sector goods along theproduction possibilities curve occurs. 40
  41. 41. Are We Passing the Debt Burdento Our Children? YESThe sizeable external debt transferspurchasing power to foreigners. 41
  42. 42. Does Government Borrowing CrowdOut Private Sector Spending?Keynesian theory assumes zero crowdingout when the federal governmentincreases spending in order to shift theaggregate demand curve rightward. Ifcrowding out occurs, reduced privatespending offsets the multiplier effect ofincreased government spending. As aresult, the expected magnitude of therightward shift in the aggregate demandcurve is partially or completely42 offset.
  43. 43. Chapter 23 Quiz ©2000 South-Western College Publishing 43
  44. 44. 1. 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. 44
  45. 45. $+50 Surplus 0 Deficit $-50 Billions of dollars$-100$-150$-200$-250$-300 Federal Budget Surpluses and Deficits$-350 60 65 70 75 80 85 90 95 00 45
  46. 46. 2. 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. 46
  47. 47. 3. In 1998, the national debt was approximately a. $60 billion. b. $600 billion. c. $6 trillion. d. $5 trillion. C. 47
  48. 48. $6 The National Debt$5 Trillions of dollars$4$3 National debt$2$1 Year 30 40 50 60 70 80 90 00 48
  49. 49. 4. 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. 49
  50. 50. $6 The National Debt$5 Trillions of dollars$4$3 National debt$2$1 Year 30 40 50 60 70 80 90 00 50
  51. 51. 5. 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. 51
  52. 52. An International Comparison of National Debt Ratios as a percentage of120% GDP, 1998100% Italy80% Japan Canada60% France U.S.40% Germany U.K.20% 0% 52
  53. 53. 6. 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. 53
  54. 54. 7. 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. 54
  55. 55. 8. 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. 55
  56. 56. 9. 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. 56
  57. 57. Ownership of the National Debt 1998 17% Public Sector 37% Private Sector 46% Foreigners 57
  58. 58. 10. 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. 58
  59. 59. 11. 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. 59
  60. 60. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 60
  61. 61. END 61
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