2. What is the current national debt? Debt Clock Two primary tools of discretionary fiscal policy: spending (G) taxes (T) THE DEFICIT AND THE DEBT

3. When government conducts expansionary fiscal policy to counteract recession, spending (G) increases and/or taxes (T) decrease. EXPANSIONARY FISCAL POLICY

4. When the government conducts contractionary fiscal policy to alleviate inflationary pressures, governments spending (G) decreases and/or taxes (T) increases. CONTRACTIONARY FISCAL POLICY

5. When G =T, government has balanced budget When G increases and/or T decreases, government budget moves toward deficit Deficit occurs when government spends more than it collects in taxes and borrows to cover the difference; G › T. This is done by issuing bonds. BUDGET DEFICIT

6. The sum of all past deficits is the debt. A budget deficit results in an increase in the demand for loanable funds. BUDGET DEFICIT

7. When T › G, there is a budget surplus. A budget surplus reduces the demand for loanable funds. If government pays off debt, there is an increase in loanable funds. BUDGET SURPLUS

8. LOANABLE FUNDS MARKET Q loanable funds S D + (G-T) D Real Int. rate i1i1 I1I1 i I and i are initial equilibrium values D=private sector demand for funds (investment). D+(G-T)=private + gov. demand for funds. I 1 and i 1 are the new equilibrium Values I 2 =new level of private investment I 1 -I 2 = government demand for funds (G-T) I I2I2

9. Crowding out refers to the decrease investment and consumption that occurs when the government’s demand for loanable funds causes the interest rate to rise. The demand by government for loanable funds decreases or crowds out the private demand for loanable funds. CROWDING OUT

10. From whom does the government borrow money to cover its debt? Individuals Institutions Other gov. agencies If you want to learn more, check out the Bureau of the Public Debt Bureau of the Public Debt. You can browse all sorts of fiscal policy data. CROWDING OUT

11. What are some of the lags associated with policy making? Inside lags: Time for collecting data Time for policy makers to recognize that policy action is necessary Deciding which policy should be undertaken Time to implement the policy CROWDING OUT

12. Outside lag: Time for the economy to respond to the policy The lags differ in time for monetary and fiscal policy Complete activity 5-7 CROWDING OUT