Econ 322 Week 13 Notes
Econ 322 Week 13 Notes Econ 322
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This 3 page Class Notes was uploaded by Tulsi on Tuesday April 19, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 17 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 04/19/16
Week 13 Thursday, April 14, 203:02 PM 4/12/16 Debt: -accumulated government borrowing over time. -How much money does the gov’t owe at this point in time? -stock variable Deficit: -difference between government spending and tax revenue in a given period of time -new borrowing undertaken by government -flow variable 1) Inflation -tends to benefit borrowers and hurts lenders -may be easier for gov’t to pay off debts, eroding the real value of debt -π=ΔD/D real value of debt would not change. ΔD = reported deficit 2) Uncounted Liabilities -official debt/deficit numbers are understated because they exclude important gov’t liabilities -Social Security and Medicare, gov’t employee pensions -Contingent liabilities: student loans -gov’t could always change the rules 3) Capital Assets -some gov’t borrowing is used to purchase valuable assets -gov’t debt should account for assets as well as liabilities -official debt #s are overstate bc only include liabilities -not all govt assets can be easily liquidated 4) Business Cycle -During a recession, tax revenue goes down, gov’t spending goes up, which increases budget deficit (automatic) -During an expansion, tax revenue goes up, gov’t spending goes down, which decreases budget deficit - state of the economy affects budget deficit 5) Debt held by Public vs Total Government Debt -US govt owes a lot of money to: -Social Security Trust Fund -Medicare Trust Fund -Federal Reserve -Federal Financing bank -US govt owes a lot to itself 4/14/16 Week 13 Page 1 "Traditional" View of Gov't Debt LM -Increase in G or decrease in T r -IS shifts right -In short run, Y and r increase -Increase in r crowds out investment -In long run, less investment means less economic growth -therefore, there is a trade-off between short-run stimulus and long-run growth IS ' IS Y Ricardian View of Gov't Debt -Ricardian Equivalence: financing gov't spending via debt is equivalent to financing it via taxes -changes in fiscal policy will not have a big effect on consumption -forward looking consumers who want to smooth consumption -If gov't stimulates economy by deficit spending, at some point, G will decrease or T will increase to pay money back -A forward looking consumer would save money today because disposable income is lower in the future -low marginal propensity to consume -stimulus won't work bc Gov't multiplier essentially 0 Does Ricardian Equivalence Work? 1) Consumer Myopia a. Consumers are not always rational and forward-looking 2) Borrowing Constraints a. People who can't borrow money now may have a high marginal propensity to consume 3) People have finite lifespans a. Gov't debt may be long-lived b. Households could have longer life spans Should the federal Government Have a Balanced Budget Amendment? Pro: -fiscal policy is not a good way to stimulate the economy -politicians may put too much weight on short term gains Con: -automatic stabilizers increase deficit during a recession -certain infrastructure projects cost a lot up front, but pay off over time. Deficit spending facilitates this The government should try to balance its "structural" budget -what the budget would be without fluctuations of the business cycle Does Gov't Have an Effect on Monetary Policy? -debt is usually easier to pay off with inflation -highly indebted governments may be tempted to generate inflation Week 13 Page 2 Week 13 Page 3
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