Question

1. We see government's debt. Every month the government is collecting record revenue amounts yet still runs a deficit. Those deficits have added up to large amounts of debt? Is the government's debt an economic problem? Why or why not?  
2. Look up the most current unemployment (U3) report? What is significant about that report? What is the current labor force participation rate and why is that an important consideration when evaluating employment? How does U3 differ from U6 #'s?
3. What are the two options for calculating GDP? What are the key differences and why are they important? Why are CPI & the GDP deflator important considers for evaluating the GDP? What impact will the countries government debt have on the economy?
4. What is the significance of considering LRAS & SAS in the Macro S & D model?
5. What do the above economic factors indicate about the current state of our economy?

Answer 1

The government's source of income is tax revenues and the money collected through taxes is spent on providing government services. When government spending is higher than tax revenues, a government is said to be running a budget deficit. The government issues treasury bonds and securities in order to finance the deficit in the form of the national debt. A low or moderate amount of national debt doesn't pose an economic problem because it implies higher spending on providing government services and therefore, fosters long-term growth if used appropriately.

The national debt is considered as an economic problem only when it is very high. A high debt-to-GDP ratio implies lower national savings, reduced private investments, and may also lead to a fiscal crisis. Government spending includes expenditure on providing services and the interest payments on the national debt. However, when national debt increases, investors lose confidence in the repaying capacity of the government and increased chances of default, leading to an excess supply of government bonds in the market. this reduces their prices and therefore, pushing the yield upwards. An increase in yield on government bonds implies higher interest payments by the government and therefore, national debt increases further. Since, government bonds are considered risk-free bonds, increases in their yield will divert some funds from private equities and debt to these bonds, leading to lower private investments. This is known as the crowding-out effect. The high debt-to-GDP ratio may hence, lead to lower income in the economy. Higher national debt may also lead to lower asset prices as the mortgage lending rates are closely tied to the short-term interest rates on government bonds and securities. A high national debt leading to a fiscal crisis also lead to a social and political problem through lower standard of living and loss in confidence.