3. The Federal Budget and Public Debt a.What is the difference between the budget deficit and...
3. The Federal Budget and Public Debt
a.What is the difference between the budget deficit and the national (public) debt?
b.Suppose the structural deficit is $50 billion, and the cyclical deficit is $30 billion. What is the actual budget deficit?
c.In part b, does the economy have an inflationary gap or a recessionary gap? Explain.
d.Why does a business downturn (recession) increase the size of the budget deficit?
Homework Answers
Ans
1 Budget deficit shows excess of Govt expenditure over its revenue. On the other hand public debt is borrowing incurred by Govt to finance deficit of many years.
2 budget deficit=structural+cyclic=50+30=80
3 recessionary gap since cyclic deficit results from fall in Govt revenues as tax collection falls in recession and increase in Govt expenditure on social security, unemployment benefits etc
4 Because as said in part 3 tax collection falls and govt expenditure on welfare etc rises
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