1. Deficits and Debt

2. Deficit A deficit is a shortfall of incoming revenues vs. spending
If revenues exceed spending >Budget Surplus
If revenues equal spending >Balanced Budget
If spending exceed revenue >Budget Deficit
Deficits happen because of overspending, debt payments, war financing, national emergencies, fiscal policy

3. National Debt
The national or public debt is total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time.
As debt grows, governments must borrow money to operate and pay interest.
This is done with Treasury Bonds – (Deficit Spending)
The accumulated debt is the national debt

4. Two Kinds of Debt External government debt Internal government debt
debt owed individuals in foreign nations.
Internal government debt
debt owed to its own citizens

5. Activity (Group) Discuss if debt is/is not something to worry about?
Make a “T” Chart and turn in as a group at the end

6. Why Debt is Bad
We have to spend on paying debt and interest (Opportunity cost)
Obligation passed on to next generation (That means you)
Foreign Dependence for financing
(China)
Private-sector can’t borrow money because government is borrowing it
(Crowding Out effect)

7. How debt is good Access to more then a cash society
Can build wealth - ?
Drives Growth/expansion
“Buy” into system (Social Control)

8. But....Government debt is different than an individual’s debt.
Since government is ongoing, it never has to settle its accounts
Governments can pay off debt by creating money.
(For a short time)
Government can collect taxes to pay the debt
Nation has vast assets
Americas Role in the World*

9. Fiscal Policy

10. Discretionary Fiscal Policy
– Those elements of the federal budget that can be changed to counter to the business cycle
Taxes
Direct Spending
Subsidies/Bailouts

12. Fiscal Policy
Deliberate changes in government spending and tax collections to affect:
Employment
Inflation
Economic growth

13. Two Types of Policy
Expansionary
Contractionary

14. Two Types of Policy Expansionary
Increase Government Spending/Subsidies
Tax Reductions
Combinations of the Two
Result: Demand for goods grow
More people employed
Inflation

15. Two Types of Policy Contractionary
Decrease Government Spending/Subsidies
Tax Increases
Combinations of the Two
Result: Demand for goods slows
More people unemployed
Inflation Less

16. Types of spending Discretionary spending
Government can spend on whatever
Non-Discretionary Spending
Must be spent on certain programs
Can’t change unless laws are changed first.

17. Non-Discretionary Spending
(Automatic Stabilizers) – Those elements of the federal budget that by law change counter to the business cycle
* unemployment benefits
* welfare benefits
* income tax revenue
No delay, or lag, because of political controversies, administrative problems

18. Problems with Using Fiscal Policy
Rational Expectations
Timing Issues
Political Issues
Regional Differences

19. Rational Expectation Theory
If individuals of Business know of policy changes that may effect them they take action to limit the impact of the changes.
Example: TAXES
Only applies when people know IN ADVANCE of a policy.

20. Fiscal Policy Timing Issues
Recognition lag
Administrative lag
Operational lag

21. Timing Issues- Recognition Lag
Time it takes for majority to understand/ acknowledge a problem and pick course of action.
(Surveys, Economic Indicators)

22. Timing Issues
Recognition lag
Administrative lag
Operational lag

23. Timing Issues- Administrative Lag
Time it takes to write and implement the laws/policy to fix the problem

24. Timing Issues- Operational lag
Time it takes for policy to work

25. Timing Issues Recognition lag Administrative lag Operational lag
-3 Months for information to become available.
Administrative lag
~3 Months because Federal legislation is required
Operational lag
~6-12 Months to see result

26. The political business cycle
The tendency of the political elements of a government to create instability by:
Reducing taxes before elections
Increasing government spending before elections
Raise taxes after elections

27. Regional Differences
Issues will vary from region to region so policy may not work the same all over.

28. Bail-Outs (Activity)
Question: Do you think it is “right” for government to bail out companies. Why or why Not-
Explain your reasons and turn in at end of hour.

29. The Federal Reserve System and Monetary Policy

30. What is monetary policy?
Monetary Policy : Are the tools used by governments to affect the economy.
So.....
If government can affect how much it costs to borrow money, how much money is in circulation and how people spend they should be able to influence economy.

31. The Federal Reserve System
Central Bank
Federal Reserve Bank
– AKA “The Fed”
Quasi-public Agency
Has twelve regional privately-owned Federal Reserve Banks
Act as fiscal agents for the U.S. Treasury

32. The Federal Reserve System

34. Why Have a Central Bank? Activity (Class)
Think of some possible reasons for the creation of the Fed?

35. Why Have a Central Bank? Bank of the Government
Central Economic “Authority”
Influence Economy
Print Money etc.
Oversee commercial banks
Back-up for regular banking system
Confidence/Stability
Avoid political influences

36. Has authority to: Regulate the private banks
Make loans to banks (Bankers Bank)
Supply money when needed to banks
Print Money, Issue Treasury securities
Regulate consumer credit system
Bank for government agencies
Manage exchange rates

37. How the Federal Reserve Controls the Money Supply
Board of Governors Sets Policy
Can change the required reserve ratio
Can change the discount rate
Can engage in open market operations

38. Required Reserve Ratio
Ratio of actual currency to investments banks can have.
$100
10% Reserve Ratio =
Bank has $90 to invest elsewhere or loan out

39. The Discount Rate
The discount rate is the interest rate that banks pay to the Fed to borrow from it.
Increasing interest rates
Slows the economy by making loans more expensive
Promotes consumer savings > decreases economic activity
• Decreasing interest rates
Expands the economy by making loans less expensive
Promotes consumer spending > Increases economic activity

40. Open Market Operations
When the Federal Reserve buys or sells securities to influence money supply
Done by: Federal Open Market Committee (FOMC)
Fed will buy money =
can lend more money cheaply
> money supply expands
Fed will sell money =
less money to lend so more expensive
> money supply contracts
(FOMC)

41. Open Market Operations
Open market operations are the Fed’s preferred means of controlling the money supply because:
More precise
Extremely flexible
Fairly predictable

42. Transmission Lags
The time between a change in interest rates and when an effect is felt in the economy
A typical lag time is 6 to 12 months