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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
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
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
12-33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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
12-35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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
12-36Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.