5.4 & 5.5 | Government Deficits, National Debt, Crowding Out

A deficit exists when…

government spending is greater than revenue raised through taxes

A budget surplus exists when…

tax revenue is greater than government spending

The national debt is…

the accumulation of all previous budget deficits and surpluses

What are the four shifters/changers of the deficit?

taxes, government purchases, transfer payments, the business cycle

An increase in taxes will (increase/decrease) the deficit. A decrease in taxes will (increase/decrease) the deficit.

decrease, increase

An increase in government purchases will (increase/decrease) the deficit. A decrease in government purchases will (increase/decrease) the deficit.

increase, decrease

An increase in transfer payments (e.g. unemployment & welfare payments) will (increase/decrease) the deficit. A decrease in transfer payments will (increase/decrease) the deficit.

increase, decrease

Automatic stabilizers impact the budget.
When the economy expands, ____ increase and ____ decrease automatically even without discretionary action. These decrease the budget deficit.

On the flip side, a contracting economy decreases ____ and increases ____, which leads to an increase in the budget deficit.

taxes, transfer payments, taxes, transfer payments

“Crowding out” tells us that a ____ impacts the loanable funds market.

government deficit or surplus

When the government has a deficit, it (increases/decreases) the demand for loanable funds because…

When the government has a surplus, it (increases/decreases) the demand for loanable funds.

increases, demands more loans alongside private businesses, decreases

What does crowding out mean?

A budget deficit will cause higher interest rates, which decreases gross investment, which leads to less capital formation, which leads to slower economic growth

Crowding out is caused by ___.

expansionary fiscal policy

How would you illustrate a crowding out budget deficit on a graph?

On the loanable funds market, shift demand right or shift supply left.

What is, essentially, the “opposite” of crowding out?

A budget surplus will cause lower interest rates, which increases gross investment, which leads to more capital formation, which leads to faster economic growth

Budget surpluses are caused by ___.

contractionary fiscal policy

How would you illustrate an (“opposite of crowding out”) budget surplus on a graph?

On the loanable funds market, shift demand left or shift supply right.

How does expansionary fiscal policy with some crowding out impact the AS/AD model?

AD shifts right, but the decrease in gross investment leads to a partial leftward AD shift