CLASS NOTES FOR ECONOMICS 252/WEEK 8

DR. WILLIAM SHINGLETON

PLEASE NOTE: THE USE OF CALCULATORS IS ALLOWED ON DR. SHINGLETON’S QUIZZES AND EXAMS BUT THEY CANNOT BE SHARED BETWEEN STUDENTS. CELL PHONES CANNOT BE USED AS CALCULATORS.

RETURN/REVIEW QUIZ

TUESDAY

SECOND EXAMINATION

READING CH 8-9-10-11

NOTES FROM SEPTEMBER 13

THURSDAY

PAYING THE BILLS CH 12

DEBT/DEFICIT/DEBT CEILING

NATIONAL DEBT/DATA FROM 16OCT2005/ SOURCE: http://www.publicdebt.treas.gov

$7,995 B TOTAL

$4,616 B OWNED BY PUBLIC

$3,379 B INTRAGOVERNMENTAL

SOCIAL SECURITY DEBT

4.70 PCT AVERAGE INTEREST RATE http://www.publicdebt.treas.gov/opd/opdar092005.htm

$352 B DEBT SERVICE IN 2005

150 MILLION WORKERS

$2,346,666.67 PER WORKER/OCT 2005

DEBT LIMIT/CEILING

$8,184,000 (AS OF 16 OCT 2005) SOURCE: http://www.publicdebt.treas.gov

MORE THAN 80 SINCE 1940

NO RULES PROHIBIT BALANCED BUDGET

A MATTER OF CHOICE

DEFICIT

OFFICIAL DATA $480 B for FY 2006 $319 FOR FY 2005

ACTUAL DEFICIT, 2005 FISCAL YEAR $7,932.710 B -$7,379,053 B = $553.657 B

CAUSE OF DEFICITS

STRUCTURAL BALANCE

DUE TO POLICY CHANGES

CYCLICAL BALANCE

DUE TO BUSINESS CYCLE CHANGES

CALLED AUTOMATIC STABILIZERS

TAX REVENUE

TRANSFERS

TOTAL BALANCE = STRUCTURAL BALANCE + CYCLICAL BALANCE

NUMBERS ON 243 ASSUME SOME SORT OF IDEAL GDP PATH

FINANCING THE DEFICIT

ROLE OF THE TREASURY

ISSUES BILLS/NOTES/BONDS

SELLS THEM AT AUCTION

FACE VALUE

MARKET PRICE

INTEREST RATE

ROLLING OVER THE DEBT/REFINANCING

EFFECT OF DEFICIT

MORE BONDS

LOWER BOND PRICES

HIGHER INTEREST RATES

EFFECT ON INVESTMENT (CROWDING OUT)

INVESTMENT AS FUNCTION OF R

HIGHER R => LESS INVESTMENT

IS IT REAL?

BOOK SAYS NO

I GUESS THEY DON'T PAY TAXES

TREASURY SELLING (OR BUYING) DEBT

ADDS TO ASSETS OF BONDS

REDUCES ASSETS OF CASH

NO NET EFFECT

SPENDING IT ADDS TO CASH ONLY/NO REAL ASSETS