Question

Please respond to all the questions below:

1. (a) What is the current U.S. federal debt? (To find this, you can go to US Gov't Dept of Treasury website.) (b) What is the current U.S. federal federal budget deficit?  (Search the internet to find the deficit for last year or an estimate of the deficit for this year. Cite your source.) Explain why our current federal debt is so much larger than our current federal deficit.

2. How would a government deficit likely affect (a) interest rates and investment?

3.  Most state governments are required to balance their budgets. Do you think our federal government should be required to always balance its budget? Briefly explain why or why not. Remember to use economic reasoning!

Answer 1

1.a. The current US federal debt- At the end of Financial year 2019 the US Federal debt is estimated to be $22.7 trillion.

1. b. The current US federal Budget deficit- The federal deficit last year was around $779 billion and is estimated to be around $1 trillion in 2019 (Source- USA Today)

1. c. A budget deficit occurs when the spending exceeds the revenues in a given year whereas a deficit occurs when deficit of each year is accumulated. The reason why our debts are more than deficits is because the government spends more than it takes in thus increasing the government debt. Once there is a budget deficit the Treasury department issues government bond, bills, notes borrowing from the public so that it can provide for the government services. The federal debt is thus the accumulation of the annual deficits and the total money the government owes its creditors. For these reasons the government debt is always greater than the budget deficit.

2. The government deficit is associated with an increase in long term interest rate. Lowering of the national savings places pressure on the short term interest rates. An increase in interest rate increases the budget deficit thus lowering the domestic investments. If the interest rate rises the bond prices fall, since government raises money through sale of bonds higher rates raises the cost of borrowing.

3. A balanced budget would mean that the federal spending should not exceed or should be equal to the federal receipts. It is very difficult to have a balanced budget and in a real world scenario would be very difficult as well, however should try their best to reduce the deficits to as minimum as possible by reducing the spending reducing subsidies and increase revenue b raising taxes. The aim should be to balance the budget, but balancing it throughout would also slower the economic growth for the nation as a whole.