Chapter 15
introducing
Deficits and Debt
Chapter Goals
Define the terms deficit, surplus, and debt and
distinguish between a cyclical deficit and a
structural deficit
Differentiate between real and nominal deficits
and surpluses
Explain why the debt needs to be judged relative
to assets
Describe the historical record for the U.S. deficit
and debt
Defining Deficits and Surpluses
A deficit is a shortfall of revenues
under payments
A surplus is an excess of revenues
over payments
In the Short Run
Deficit Short Run
In the short run, if the economy is
below potential, deficits are good
because deficits increase
expenditures moving output closer
to potential
In the Long Run
Surpluses Long-Run
• Long-run surpluses are good
because they provide saving for
investment
We Are Back To Trade Off
Short Run
Deficit
Good
Long Run
Surplus
Good
Short Run or Long Run?
Who Makes Fiscal Policy?
• The President and Congress make fiscal policy
– This is complicated and can be time consuming,
especially when one political party controls
Congress while the president belongs to the other
party
– No one seems to be in charge of making fiscal
policy
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Deficit Dilemma**
• Deficits, Surpluses, and the Balanced Budget
– When government spending is greater than
tax revenue, we have a federal budget
deficit
• The government borrows to make up the
difference
• Deficits are prescribed to fight recession
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Deficits
Spending
Tax
Revenue
The Deficit Dilemma
• Deficits, Surpluses, and the Balanced
Budget
–When the budget is in a surplus
position, tax revenue is greater than
government spending
• Budget surpluses are prescribed to
fight inflation
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Surplus
Spending
Tax
Revenue
The Deficit Dilemma
• Deficits, Surpluses, and the Balanced
Budget
–We have a balanced budget when
government expenditures are equal
to tax revenue
• We’ve never had an exactly
balanced budget
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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