Economics 4e HomeEconomics In The NewsSite MapGlossaryContact UsSmartWork
Chapter123456789101112131415161718192021222324252627282930313233343536373839

Chapter Review Chapter 25: Government Finance at Full Employment

  1. When the government runs a deficit or a surplus, the capital market is affected. If there is a deficit, the government must borrow in the capital market to finance the deficit.
  2. In the full-employment model, an increase in government expenditures matched by an increase in taxes reduces disposable income. This drop, in turn, reduces both consumption and saving at full-employment output. Saving decreases, the equilibrium real interest rate rises, and the equilibrium level of investment falls.
  3. Changes in government revenues and expenditures do not affect full-employment output or employment, but they do alter how output is divided between consumption, investment, and government purchases.
  4. During the past twenty-five years, the budget of the U.S. federal government has swung from large deficits in the 1980s and early 1990s to surpluses from 1998 to 2001, and then back to large deficits.
  5. Government borrowing can be an economic burden for future generations in several ways. First, future generations may bear the responsibility of paying off the debt; there is a transfer of wealth from one generation to another. Second, government borrowing can raise real interest rates and crowd out private investment, thereby reducing future output and wages.
  6. Future expenditures by the government on homeland security, Social Security, and Medicare are likely to increase in the future.
W.W. Norton and Company College Home Page