SP - Government Debts and Deficits (Lesson)

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Government Debts and Deficits

Introduction

StabilizationPolicies_govdebt.png A budget deficit occurs when the government spends more than it collects in taxes and borrows to cover the difference. It does this by issuing bonds. The sum of past deficits is the debt. The debt incurs annual interest charges.

 

The Tools of Government

The two primary tools of discretionary fiscal policy are

  1. government spending (G)
  2. taxes (T)

When government conducts expansionary fiscal policy to counteract recession, G increases and/or T decreases. When G increases and/or T decreases, the government budget moves towards a larger deficit or a smaller surplus. A budget deficit occurs when the government spends more than it collects in taxes and borrows to cover the difference. It does this by issuing bonds. The sum of past deficits is the debt. The debt incurs annual interest charges.

 

What are the Effects of Government Deficit on Loanable Funds Market?

Graph depicting the information in the paragraph preceding it When the government conducts contractionary fiscal policy to alleviate inflationary pressures, G decreases and/or T increases. When G decreases and/or T increases, the government budget moves towards a smaller deficit or a larger surplus. A budget surplus happens when the government taxes more than it spends. The surplus can be used to reduce the debt.

The effect of government borrowing can be modeled using the loanable funds market. A government budget deficit results in an increase in the demand (D) for loanable funds. A budget surplus reduces the demand for loanable funds. It results in an increase in the supply (S) of loanable funds if government pays off the debt. 

 

 

 

 

 

 

 

 

Watch the presentation below to learn more about the Government Debts and Deficits.

 

Watch the video below to learn more about the federal budget.

 

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

What's Your takeaway? Icon Long Term Economic Growth Reminders:

  • For growth to occur, economic agents – producers and consumers – must have the appropriate incentives.
  • Growth accounting focuses on three sources of long-run economic growth: supply of labor, supply of capital and the level of technology.
  • Increases in any one of these elements will increase real GDP.
  • The growth in the supply of labor is primarily the population growth rate.
  • Increases in capital or in technology increase labor productivity and thus increase real GDP.

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