Week 2 Book Notes on Chapter 4
Week 2 Book Notes on Chapter 4 ECO 4504
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This 4 page Class Notes was uploaded by Cindy Osorto on Friday January 30, 2015. The Class Notes belongs to ECO 4504 at Florida International University taught by Murgo in Winter2015. Since its upload, it has received 101 views. For similar materials see Public Finance and Public Policy in Economcs at Florida International University.
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Date Created: 01/30/15
COLOR MEANING Blue means chapter highlighted vocabulary word Purple means in chapter vocabulary word CHAPTER 4 Budget Analysis and Deficit Financing 0 Introduction of Chapter Since the 1960s every president has said that they he would balance the federal budget or to reduce the deficit in his State of the Union Address However only President Clinton was able to shrink the deficit in his 1993 2000 term Four presidents had the deficit increase including the President Bush Jr 0 41 Government Budgeting O The Budget Deficit in Recent Years I Government debt is a stock variable and the deficit is a flow variable I A stock variable is measured at one specific time and represents a quantity existing at that point in time A flow variable is measured over an interval of time I Definition debt is the amount that a government owes to those who have loaned it money I Definition deficit is the amount by which a government s spending exceeds its revenues in a given year I Each year s deficit flow is added to the previous year s debt stock to produce a new stock of debt owed l Figure41 Federal taxes spending and the deficit through time in the US shows that spending rose during the 19603 up until the 19803 but tax revenues didn t keep pace The deficit stopped in the 903 but began again in 2001 O The Budget Process l The president submits a budget to Congress on the first Monday of February The House Representatives and Senators work on the Congressional Budget Resolution a blueprint of the coming year s budget as well as the next five years I Definition entitlement spending are mandatory funds for programs for which funding levels are automatically set by the number of eligible recipients not the discretion of Congress 0 Two most important Social security and medicare Q If Congress wishes to change entitlement programs they must submit a revision called reconciliation instructions to the specific committees in charge of a specific program and then the president must approve or disapprove the proposed changes l Definition discretionary spending is optional spending set by appropriation levels each year at Congress s discretion 0 13 suballocations for each 13 subcommittees representing different areas of government Each of the 13 bills must be approved by the full committee and finally the bill must be approved by the president The president may veto l Budget Policies and Deficits at the State Level 0 While the federal government isn t required to have a balanced budget states are Since banking crisis due to deficits during the 1840s many states agreed to sign a balanced budget requirement 0 Definition Balanced budget requirement is a law forcing a given government to balance its budget each year spendingrevenue 0 Two thirds of states have ex post BBR the other third have ex ante BBR Ex post BBR are more effective due to more difficulty of evasion than ex ante policies 0 Definition ex post BBB is a law forcing a given government to balance its budget by the end of each fiscal year 0 Definition ex ante BBB is a law forcing either the governor andor the legislature to pass a balanced budget at the start of each scalyean 0 42 Measuring the Budgetary position of the Government Alternative Approaches Q There are less common but alternative measures to observing deficits 0 Real vs Nominal I There can be beneficial effects of having the government be in debt and with inflation l Definition Real prices are prices stated in some constant year s dollars It allows analysts to compare the change of a goods value over time relative to the price level and how much of other goods must be given up I Definition Nominal prices are prices simply stated in today s dollars I Definition Consumer Price Index CPI is an index that captures the change over time in the cost of purchasing a typical bundle of goods l Observing the CPI allows for a comparison of changes in relative prices of different goods If there s a falling real price the cost of a good relative to other goods is lower the price rose by less than the percentage of inflation Rising real price indicates that the cost of a good rose higher than other goods Health Care costs rose for example I Economic Conditions 0 Definition automatic stabilizers are automatic reductionsin revenues and increases in outlays when the economy shrinks relative to its potential 0 Definition cyclically adjusted budget deficit is a measure of the government s fiscal position if the economy were operating at full potential GDP l Cash vs Capital Accounting 0 Definition cash accounting is a method of measuring the government s fiscal position as the difference between current spending and current revenues Q m capital accounting is a method of measuring the government s fiscal position that accounts for changes in the value of the government s net asset holdings 0 Figure 42 Economic Adjustment to Measuring the Budget Deficit 0 Problems with Capital Budge ng O Statis vs Dynamic Scoring 0 Definition static scoring is a method used by budget modelers that assumes that government policy changes only the distribution of total resources not the amount of total resources 0 Definition dynamic scoring is a method used by modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources 0 43 Do Current Debts and Deficits Mean Anything A LongRun Perspective 0 Section Introduction I Definition implicit obligations are financial obligations that the government has in the future that are not recognized in the annual budgetary process 0 Background Present Discounted Value l Definition present discounted value PDV is the value of each period s dollar amount in today s terms 0 Why Current Labels May be Meaningless 0 Alternative Measures of Long Run Governance l Definition lntertemporal budget constraint is an equation relating the present discounted value of the government s obligations to the present discounted value of its reserves l Generational Accounting 0 Problems with These Measures I What Does the US Government Do 0 Figure 43 Project vs Actual SurplusDeficit 0 Application The Financial Shenanigans of 2001 0 44 Why Do We Care About the Government s Fiscal Position 0 Shortrun vs Longrun Effects of the Government on the Macroeconomy l Definition short run stabilization issues is the role the government in combating the peaks and troughs of the business cycle I Definition automatic stabilization involves a set of policies that automatically alter taxes or spending in response to economic fluctuations in order to offset changes in household consumption levels I Definition discretionary stabilization are policy actions taken by the government to particular instances of an underperforming or over performing economy 0 background Savings and Economic Growth I More Capital More Growth I More Savings More Capital 0 The Federal Budget Interest Rates and Economic Growth l Ricardian Equivalence l Expectations l Evidence 0 lntergenerational Equity l Definition intergenerational equity is the treatment of future generations relative to current generations 0 45 Conclusion 0 Definition G g
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