15.3 Federal Deficits and Federal Debt CONTEMPORARY ECONOMICS 11/9/2018 15.3 Federal Deficits and Federal Debt Objectives Discuss why federal deficits have been common since the Great Depression. Distinguish between crowding out and crowding in. Discuss changes in the relative size of federal debt since World War II. Explain who bears the burden of the federal debt. LESSON 15.3

15.3 Federal Deficits and Federal Debt Key Terms crowding out crowding in

Budget Deficits Federal deficits over the years 15.3 Federal Deficits and Federal Debt Budget Deficits Federal deficits over the years Why is the budget usually in a deficit? The surplus of 1998–2001

Federal Deficits and Surpluses as Percent of GDP Since 1934 15.3 Federal Deficits and Federal Debt Federal Deficits and Surpluses as Percent of GDP Since 1934 Between 1934 and 2007, the federal budget was in deficit in all but 12 years. The largest deficits occurred during World War II. Figure 15.4

Deficits and Interest Rates 15.3 Federal Deficits and Federal Debt Deficits and Interest Rates Crowding out occurs when higher government deficits drive up interest rates and thereby reduce private investment. Crowding in occurs when government spending stimulates private investment in an otherwise stagnant economy.

Investment Fluctuations 15.3 Federal Deficits and Federal Debt Investment Fluctuations Investment fluctuates much more from year to year than does GDP. Figure 15.5

Federal Debt Gross debt versus debt held by the public 15.3 Federal Deficits and Federal Debt Federal Debt Gross debt versus debt held by the public Debt relative to GDP

Federal Debt Held by the Public as Percent of GDP, 1940 to 2004 15.3 Federal Deficits and Federal Debt Federal Debt Held by the Public as Percent of GDP, 1940 to 2004 The federal debt held by the public relative to GDP dropped by nearly two-thirds between 1946 and 2007. Figure 15.6

Economic Impact of the Debt 15.3 Federal Deficits and Federal Debt Economic Impact of the Debt Debt and interest rates Who bears the burden of the debt? We owe it to ourselves Foreign ownership of debt