Economics Lecture 4: Budget Surpluses and Deficits
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Questions and Answers

What is a budget deficit?

The amount by which government spending exceeds government revenue in a given time period.

What is the formula for calculating a budget deficit?

Budget deficit = government spending - Tax revenues

What is the difference between a cyclical deficit and a structural deficit?

  • Cyclical deficits are caused by a strong economy, while structural deficits reflect a temporary problem.
  • Cyclical deficits are long-term, while structural deficits are short-term.
  • Cyclical deficits are caused by a natural disaster, while structural deficits reflect a war.
  • Cyclical deficits are caused by a weak economy, while structural deficits reflect a chronic problem. (correct)

    • A temporary spike in deficits to combat a short-term national emergency is reasonable.

    <p>True</p> Signup and view all the answers

    What is the national debt?

    <p>The accumulated debt of the government, which is a stock of bonds created by annual deficit flows.</p> Signup and view all the answers

    What is the difference between internal debt and external debt?

    <p>Internal debt is held by households and institutions within the country, while external debt is held by foreign households and institutions.</p> Signup and view all the answers

    What is refinancing?

    <p>The issuance of new debt in payment of debt issued earlier.</p> Signup and view all the answers

    What is debt service?

    <p>The interest required to be paid each year on outstanding debt.</p> Signup and view all the answers

    What are the consequences of a growing public/national debt?

    <p>Lower national savings and income, higher interest payments, and decreased ability to respond to problems.</p> Signup and view all the answers

    What is crowding out?

    <p>The reduction in private sector borrowing (and spending) caused by increased government borrowing.</p> Signup and view all the answers

    What is crowding in?

    <p>The increase in private sector borrowing (and spending) caused by decreased government borrowing.</p> Signup and view all the answers

    Study Notes

    Budget Basics

    • Budget Deficit: Occurs when government spending exceeds tax revenues, calculated as: Budget Deficit = Government Spending – Tax Revenues.
    • Deficit Spending: Involves using borrowed funds to finance expenditures over tax revenues.
    • Budget Surplus: Arises when tax revenues exceed government spending.

    Types of Budget Deficits

    • Cyclical Deficits: Short-term deficits caused by economic downturns, leading to reduced tax revenue and increased government assistance spending.
    • Structural Deficits: Long-term deficits existing even in a strong economy, signaling chronic issues needing significant policy changes.

    Key Differences

    • Cyclical Deficits: Temporary, related to economic fluctuations, can be managed during recovery.
    • Structural Deficits: Persistent, needing ongoing reform in tax and spending policies as one-time fixes won't suffice.

    Debt and Economic Sustainability

    • National Debt: The total accumulated debt from government borrowing, primarily through treasury bonds, reflecting annual deficits.
    • Debt Components:
      • Internal Debt: Held by domestic households and institutions.
      • External Debt: Held by foreign entities and individuals.

    Debt Management

    • Refinancing: Issuing new bonds to replace old, increasing debt burdens over time.
    • Debt Service: The interest on national debt, which impacts the government’s budget flexibility for essential services.

    Deficit and Debt Ceilings

    • Deficit Ceilings: Legally mandated limits on budget deficits.
    • Debt Ceilings: Explicit restrictions on the total outstanding national debt, aiming to control public borrowing.

    Consequences of Rising National Debt

    • Economic Effects:
      • Reduced national savings and income levels.
      • Increased interest payments leading to potential tax hikes and spending cuts.
      • Limited governmental capacity to address economic challenges.
      • Heightened risk of fiscal crises.

    Crowding Effects

    • Crowding Out: When government borrowing diminishes the available funds for private sector borrowing, especially in nearing full employment economies.
    • Crowding In: Occurs when decreased government borrowing allows for more private sector borrowing, potentially boosting consumer spending when interest rates drop.

    Utilization of a Budget Surplus

    • Surplus funds can be used to:
      • Cut taxes.
      • Enhance income transfers.
      • Increase spending on goods and services.

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    Lecture 4: Public Finance PDF

    Description

    This quiz explores the concepts of budget surpluses and deficits as discussed in Lecture 4 by Dr. Mona Mahmoud. It covers the definitions, implications of deficit spending, and the distinction between surplus and deficit scenarios in government finance. Test your understanding of these essential economic principles!

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