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

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

3. 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. 4 Aggregate Supply The total quantity of final goods and services that will be supplied at various prices

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

6. 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. 7 Rolled Over means... Borrowing to pay off maturing debt

8. 8 Refunding The refinancing of past government debt that is maturing

9. 9 The Difference Between Federal Outlays and Federal Receipts (billions) Year Receipts Outlays + or - 1960 $92.5 $92.2 $.3 1965 116.18 118.2 -1.4 1970 192.8 195.6 -2.8 1975 279.1 332.3 -53.20 1980 517.1 590.9 -73.8 1985 734.1 946.4 -212.3 1990 1,031.3 1,252.7 -221.4 1995 1,463.2 1,637.1 -174.4 1996 1,587.6 1,698.1 -110.4 1997 1,723.4 1,752.2 -28.8 1998 1,721.8 1,652.5 48.9* Exhibit 21 -1 * First Quarter only

10. 10 Exhibit 21 -2 2000 1500 1000 500 Receipts Outlays Billions of dollars The Difference Between Federal Outlays & Receipts 19981975 1970 198019851990 1995

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

12. 12 Federal Outlays & Receipts as a Percentage of GDP Year Receipts Outlays Difference 1960 18.3% 18.3% 0% 1965 7.4 17.6 -.2 1970 19.6 19.9 -.3 1975 18.5 22.0 -3.5 1980 19.6 22.3 -2.7 1985 18.5 23.9 -5.4 1990 18.8 22.9 -4.1 1995 20.1 22.5 -2.4 1996 20.7 22.2 -1.5 1997 21.3 21.7 -.4 1998 19.8 19.0.8* * first quarter only Exhibit 21 - 3

13. 13 19981975 Exhibit 21 - 4 1970 198019851990 1995 22% 20% 18% 16% 0% 24% Federal Outlays & Receipts as a Share of GDP Receipts Outlays

14. 14 To whom the Federal Debt is Owed, as of June 30, 1998 billions % Domestic Investors $ 2,068 37% U.S. Government Agencies 1,827 32 Foreign Investors 1,276 23 Federal Reserve Banks 472 8 Total National Debt $ 5,643 100% Exhibit 21 -5

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

16. 16 Interest Rate (%) 6 The Effect of a Rise in Government Borrowing Exhibit 21 - 6 8 A DD D'D' $500$530$550 Loanable Funds (billions) B S

17. 17 Interest Rate (%) 4 The Effect of a Reduction in Government Borrowing Exhibit 21 - 7 6A DD D'D' $450$480$500 Loanable Funds (billions) S B

18. 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. 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. 20 Monetized When the Fed purchases newly issued Treasury securities, that credits the Treasury’s deposit account

21. 21 Exhibit 21 -8 12.0 9.0 6.0 3.0 Exports Imports 15.0 19981985 1995 Exports and Imports Relative to Gross Domestic Product 199019801975 1970 Percent of GDP Year

22. 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. 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. 24 Exhibit 21 - 9 -2.0 -2.5 -3.0 -3.5 -1.5 Capital Flows/GDP( %) -0.5 0.0 0.5 1.0 1.5 Capital Flows Relative to GDP 1970 1975 1980 1985 1990 1995 1998

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

26. 26 Exhibit 21 - 10 -150 -200 -250 -300 -100 Capital Flows/GDP( %) -50 0 50 Capital Flows Relative to GDP Federal Government Balance Trade Balance 1970 1975 1980 1985 1990 1995 1998

27. 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)