Question

discuss the magnitude of the budget deficit and national debt a. include the magnitude of the debt b. discuss the benefits and costs of having a national debt c. theories or types of balanced budgets d. political implications of the debt

Answer 1

a. Government debt is the stock of outstanding IOUs issued by the government at any time in the past and not yet repaid. Governments issue debt whenever they borrow from the public; the magnitude of the outstanding debt equals the cumulative amount of net borrowing that the government has done. The deficitis the addition in the current period (year, quarter, month, etc.) to the outstanding debt. The deficit is negative whenever the value of outstanding debt falls; a negative deficit is called a surplus

b. Public debt generally relates only to domestic debt. But some nations also include the de.bt owed by governments, provinces, and municipalities. Therefore, be cautious to make sure that the definitions are the same when comparing public debt between nations.

Public debt is a useful way for nations to obtain additional resources to invest in their economic growth in the brief term. Public debt is a secure way for foreigners by purchasing government bonds to invest in a country's development.

This is far safer than direct investment from abroad. That's when foreigners buy at least 10 percent stake in the firms, businesses, or real estate of the country. It is also less dangerous than investing through its stock market in the country's public companies. Public debt is appealing to investors at risk because it is supported by the state itself.

Public debt improves the standard of living of a country when correctly used. That's because it allows the state to build new roads and bridges, improve training, and provide retirement. This encourages people to spend more now rather than save for retirement. Private citizens ' expenditure further boosts financial development.

Governments tend to take on too much debt because they are popular with voters because of the advantages. Investors therefore usually measure the level of risk by comparing debt with the total economic output of a country, known as GDP. The debt-to-GDP ratio shows how probable the nation will be able to pay off its debt. Usually investors are not worried until the ratio of debt to GDP reaches a critical level. In the long run, too big public debt can function as riding with the emergency brake on. In exchange for higher default risk, investors drive up interest rates. This makes financial expansion elements such as housing, company development, and auto loans more costly. To avoid this burden, governments must be careful to find that sweet spot of public debt. To drive economic growth, it must be big enough, but tiny enough to maintain interest rates low.

c. Cyclically Balanced Budget- A cyclically balanced budget is an option to an annually balanced budget. This idea counters the stiffer technique of balancing a budget by calendar year in favor of balancing the business cycle-based budget. This implies that the financial cycle should govern budget surpluses and deficits

Federal and State Balanced Budgets- A number of amendments were suggested to the Constitution of the United States requiring balancing the budget of the federal government as a matter of law. None of the amendments have been adopted. But the vast majority of U.S. states have enacted legislation that requires some type of balanced state budget. In reality, according to the National Conference of State Legislatures, as many as 49 countries have balanced budget criteria, although a couple of those states ' status as balanced budget countries is contested. Vermont is the only state that obviously does not have balanced legislation on the budget.

d.  The US economy is heavily dependent on foreign capital inflows from nations with elevated savings rates to satisfy its national investment requirements and finance the federal budget deficit, given its low savings rate. An significant short-term political implication of China's big holdings in US public debt is that if China were to suddenly decide to sell a big proportion of its holdings, it would also cause other foreign investors to sell off their holdings, which could dramatically destabilize the US economy. Possible consequences can be the depreciation of the US dollar as its supply on foreign exchange markets increased and a large increase in US interest rates as a crucial source of funding for investments and the budget deficit is withdrawn from financial markets