Chapter 21 Financial Effects of the Government and Foreign Sectors ©2000 South-Western College Publishing

2 Fiscal Policy Government spending and taxing decisions to speed up or slow down the level of economic activity

3 Aggregate Demand The total quantity of final goods and services that will be demanded at various prices, including consumption investment government purchases of goods and services

4 Aggregate Supply The total quantity of final goods and services that will be supplied at various prices

5 Public Debt The sum of all past government deficits less past surpluses

6 Government Outlays – Government Receipts = New Borrowing = Net New Debt Issued by the Treasury (bills, notes, and bonds) = Net Government Demand for Loanable Funds ( Eq.21.1)

7 Rolled Over means... Borrowing to pay off maturing debt

8 Refunding The refinancing of past government debt that is maturing

9 The Difference Between Federal Outlays and Federal Receipts (billions) Year Receipts Outlays + or $92.5 $92.2 $ , , , , , , , , , , * Exhibit * First Quarter only

10 Exhibit Receipts Outlays Billions of dollars The Difference Between Federal Outlays & Receipts

11 Regularized The advanced announcements of Treasury intentions to borrow at standard intervals

12 Federal Outlays & Receipts as a Percentage of GDP Year Receipts Outlays Difference % 18.3% 0% * * first quarter only Exhibit

Exhibit % 20% 18% 16% 0% 24% Federal Outlays & Receipts as a Share of GDP Receipts Outlays

14 To whom the Federal Debt is Owed, as of June 30, 1998 billions % Domestic Investors $ 2,068 37% U.S. Government Agencies 1, Foreign Investors 1, Federal Reserve Banks Total National Debt $ 5, % Exhibit 21 -5

15 Crowding Out The reduction in private borrowing and spending due to higher interest rates that result from government deficit financing

16 Interest Rate (%) 6 The Effect of a Rise in Government Borrowing Exhibit A DD D'D' $500$530$550 Loanable Funds (billions) B S

17 Interest Rate (%) 4 The Effect of a Reduction in Government Borrowing Exhibit A DD D'D' $450$480$500 Loanable Funds (billions) S B

18 Sources of Funds Uses of Funds Tax Receipts + Borrowing = Government spending on goods and services + Government spending on transfer payments + Interest payments on the public debt + Changes in financial assets held (Eq. 21.2)

19 Sources of Funds Uses of Funds Tax Receipts + Net Borrowing = Government spending on goods and services + Government spending on transfer payments + Interest payments on the public debt (Eq. 21.3)

20 Monetized When the Fed purchases newly issued Treasury securities, that credits the Treasury’s deposit account

21 Exhibit Exports Imports Exports and Imports Relative to Gross Domestic Product Percent of GDP Year

22 Net Capital Inflow occurs... …when the purchases of U.S. financial claims by foreigners exceed purchases of foreign financial claims by U.S. entities

23 Net Capital Outflow occurs... …when the purchases of foreign financial claims by U.S. entities exceed the purchases of U.S. financial claims by foreigners

24 Exhibit Capital Flows/GDP( %) Capital Flows Relative to GDP

25 Twin Deficits During the 1980’s, the high trade deficit and the high government deficit

26 Exhibit Capital Flows/GDP( %) Capital Flows Relative to GDP Federal Government Balance Trade Balance

27 Sources Foreign Exchange Uses Foreign Exchange Foreign purchases of U.S. purchases of U.S. goods and services foreign goods & services + Net transfers from Net transfers to foreigners = foreigners + Net foreign purchases Net U.S. purchases of U.S. financial assets foreign financial assets (Eq. 21.4)