Government Spending and Deficits – Macroeconomics CH14 Notes

Summary:

Chapter 14 discusses government spending and deficits. It explores the effects of government spending, such as crowding out, which occurs when government borrowing leaves little money for businesses and consumers to borrow for expansion and purchases. Problems with policy levers can cause a decrease in investment or consumption and a reduction in resources abroad, affecting America’s ability to repay loans.

The chapter also covers pork barrel projects, which are localized government spending initiatives that often take precedence over necessary spending cuts during economic booms. These projects are used to gain votes and bring benefits to a politician’s district, such as building bridges or expanding local colleges.

Deficit spending is when the government spends more than it receives in tax revenue, resulting in a budget deficit. This phenomenon is particularly high during times of implementing Keynesian Economics. On the other hand, a budget surplus occurs when government revenue exceeds spending.

Keynes believed a balanced budget was only necessary during full employment, and deficits were acceptable to stimulate the economy during recessions. Deficits and surpluses are by-products of countercyclical fiscal policy, where transfer payments increase during bad times, leading to a larger deficit. Automatic spending, such as social security payments, veterans’ benefits, and debt interest, constitutes a significant portion of the federal budget.

Excerpt:

Government Spending and Deficits – Macroeconomics CH14 Notes 

Chapter 14: Government Spending and Deficits

The Effects of Government Spending:

Crowding Out: Exists when the government borrows to finance its spending, leaving very little money left for businesses to borrow for expansion and leaving very little for consumers to borrow to buy homes, cars, and appliances

• Caused by problems with policy levers
  • Investment (I) or Consumption (C) may shrink when government spending and borrowing increases
  • Resources abroad may diminish due to excessive government spending, as it shows the inability of America to pay back loans.