CHAPTER 31: DEFICITS AND DEBT
CHAPTER 31: DEFICITS AND DEBT
Questions and Exercises
1. It follows from the long-run framework because in this framework, deficits are
warranted only when government investment is more productive than private
2. It depends. Your cash flow budget is in deficit since your expenditures exceed
3. The completed table is shown below:
Revenues Expenditures Debt
Year 1 $203 $202 $629
4. The two ways the government can finance a deficit is by selling bonds or by
5. Actual deficit = Structural deficit + Cyclical deficit
6. The structural deficit is $150. Here is how it is calculated: Assuming expenditures
7. a. The cyclical deficit must be zero since it is defined as zero at potential output.
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CHAPTER 31: DEFICITS AND DEBT
b. The structural deficit is $200 billion.
c. Now $60 billion of the deficit is cyclical (.3 × 200) and $140 billion is structural
d. There is a cyclical surplus of $30 billion. The structural deficit is $230 billion
8. The real deficit is calculated as the nominal deficit less the product of the inflation
a. The real budget has surplus of $800. (Real deficit = 220 billion – (.10 × 3 trillion)
9. There is a real surplus of $100 billion. Given that the nominal deficit is $300
10. It would not differ; expected inflation does not enter into the determination of the
11. a. Debt service payments are $21.6 billion (0.06 × $360 billion).
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CHAPTER 31: DEFICITS AND DEBT
12. Three ways individual debt differs from government debt include: (1) government
13. No. Financing internal debt causes redistribution because interest payments are
14. a. Since the real deficit is rising at a faster rate than real growth in the economy, the
b. At some point the debt/GDP ratio will become so large that creditors will begin to
15. The more debt that is external (held by individuals and governments outside a
16. Debt service is an important measure of whether debt is a problem because
17. A debt that is too high may lead bondholders to require a risk premium on bonds.
18. If the Fed buys up bonds, it may lead to inflation, which will lead to higher
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CHAPTER 31: DEFICITS AND DEBT
Questions from Alternative Perspectives
1. Austrian
Austrians believe that our lack of knowledge of the right policy is a severe limit to
2. Institutionalist
a. Low income groups have the highest marginal propensity to consume.
b. To achieve the greatest demand stimulus from a given tax cut, the cut should go to
c. Tax cuts will increase the debt, which will benefit the rich who hold most of the
3. Post-Keynesian
a. Bush’s initial argument for the tax cut was a long-run supply-side argument.
b. From a Post-Keynesian point of view, President Bush should not have worried
4. Feminist
a. A program that provides a “baby bonus”—a payment for each child that a woman
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CHAPTER 31: DEFICITS AND DEBT
c. Feminists believe that such effects are important to consider because if one does
Issues to Ponder
1. A structural deficit would exist even if the economy were at its potential level of
income, which would be at full employment, or at where the unemployment rate
2. Debt is defined as accumulated deficits, and is also a summary measure of a
3. To make the deficit look as small as possible, we would do the following:
4. Deficits and surpluses are only summary measures of the economy. A government
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.