1. Warm-Up
You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced-budget rule for the federal government and for your recommendation on whether she should support such a rule. How do you respond?

2. Warm-UP
What is the difference between a budget surplus and a budget deficit?
Is it always better to have one over the other?
US National Debt

3. Long-Run Implications of Fiscal Policy
Chapter 29: Fiscal Policy
(pages )

4. Budget Balance Savings by government SGovernment = T – G – TR
SGovernment > 0  SURPLUS
SGovernment < 0  DEFICIT

5. Visualizing U.S. Deficits
How large is the deficit?
What would cutting it look like?
The money hole…
Visualized in $100 bills

6. Scenario 1: Recessionary Gap
LRAS
SRAS
AD2
AD1

7. Scenario 1: Recessionary Gap
Fiscal policies include:
Cutting taxes
Increasing government spending
Increasing transfer payments
Reduces budget balance

8. Scenario 2: Inflationary Gap
LRAS
SRAS
AD2
AD1

9. Scenario 2: Inflationary Gap
Fiscal policies include:
Increasing taxes
Cutting government spending
Cutting transfer payments
Increases budget balance

10. Budget Balance and Cycles…

11. Budget Balance and Cycles…
Changes to budget caused by AUTOMATIC STABILIZERS
Need better measure
CYCLICALLY ADJUSTED BUDGET BALANCE
Budget balance if GDP = Yo

12. Should We Always Balance?
Scenario: Recessionary Gap
Tax revenue is falling
Budget balance declining
Options include:
Increase taxes
Cut spending
All options make problems WORSE

13. Should We Always Balance?
Economists recommend balance ON AVERAGE
Deficits during bad years
Surpluses during good years
Difficult to achieve in real life

14. Is Debt a Problem? www.usdebtclock.org Concerned with PUBLIC DEBT
Held by individuals and institutions
Nearly $9 trillion in US
Expressed as % of GDP

16. Is Debt a Problem? Yes… Reason 1: Crowding out S Real interest rate D1
DPrivate sector

17. Is Debt a Problem? Yes… Reason 2: Future financial pressure
Must borrow to pay debt
Creates vicious cycle
Takes away funds for future projects

18. How Big a Problem Is it? Measured by DEBT-GDP RATIO
QUESTION: Does the US have worse debt than Canada?

19. Something Else to Worry About
Be aware of IMPLICIT LIABILITIES
Future spending promises
Add to overall debt
EXAMPLES: Medicare, Medicaid and Social Security
Make up nearly 50% of budget already
Will only grow with time

20. Implicit Liabilities

22. Who Do We Owe?
gs/worldviews/wp/2013/10/10/this- surprising-chart-shows-which- countries-own-the-most-u-s-debt/

23. Mini-FRQ Time… Consider the information in the chart
Answer questions on your handout
Country of Zeta
Amount
Tax revenues
$2,000
Government purchases
$1,500
Government transfers
$1,000
Real GDP
$20,000
Potential output
$18,000