1 Introduction to Macroeconomics
2 Measuring the Macroeconomy
3 An Overview of Long-Run Economic Growth
4 A Model of Production
5 The Solow Growth Model
6 Growth and Ideas
7 The Labor Market, Wages, and Unemployment
8 Inflation
9 An Overview of the Short-Run Model
10 The IS Curve
11 Monetary Policy and the Phillips Curve
12 Stabilization Policy and the AS/AD Framework
13 The Global Financial Crisis: Overview
14 The Global Financial Crisis and the Short-Run Model
15 The Government and the Macroeconomy
16 International Trade
17 Exchange Rates and International Finance
18 Parting Thoughts




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Chapter 15: The Government and the Macroeconomy

Chapter Outline

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Key Concepts

  1. The current U.S. fiscal situation is relatively typical of recent decades: spending and taxes are low relative to most other rich countries, there is a modest budget deficit, and the debt-GDP ratio is not especially high.

  2. Absent changes in policy, this situation is likely to change significantly and for the worse in coming decades. The main reason is growth in transfer payments, especially for health care but also for Social Security.

  3. The government's intertemporal budget constraint says that the budget must balance in a present discounted value sense. That is, the present discounted value of spending must equal the present discounted value of taxes, if the economy begins with no debt. To the extent that debt is initially present, tax revenues must exceed spending.

  4. Very large debts are potentially problematic, leading to dangers of default and high inflation. However, there is no magic level of debt at which this occurs. An economy's size and growth prospects are important considerations, as is the ability of the government to collect taxes and restrain spending.

  5. The extent to which government deficits crowd out investment is unclear. The Ricardian equivalence argument says that private spending should rise to offset temporary deficits, holding spending constant. This offset seems to be incomplete in the short run, however, as government saving and the investment rate move together.

15.1 Introduction

15.2 U.S. Government Spending and Revenue

  • Spending and Revenue over Time
  • The Debt-GDP Ratio

15.3 International Evidence on Spending and Debt

15.4 The Government Budget Constraint

  • The Intertemporal Budget Constraint

15.5 How Much Can the Government Borrow?

  • Economic Growth and the Debt-GDP Ratio
  • High Inflation and Default
  • Generational Accounting
  • Deficits and Investment
  • Case Study: The War in Iraq

15.6 The Fiscal Problem of the Twenty-First Century

  • The Problem
  • Case Study: Financing the Social Security Program
  • Possible Solutions

15.7 Conclusion

15.8 Additional Resources

  • Summary
  • Key Concepts
  • Review Questions
  • Exercises
  • Worked Exercises
« Return to Chapter 15 Study Plan