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UMass Amherst ECON 104 - Chapter 9: Debt and Deficit

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These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Lecture!12!!Outline(of(Last(Lecture((I. GDP!=!C!+!I!+!G(a. Consumption!(C)!(II. Equations(a. Average!Propensity!to!Consume!(APC)(b. Marginal!Propensity!to!Consume!(MPC)(c. Marginal!Propensity!to!Save!(MPS)(III. Consumption!Function(IV. Savings!Function(V. Investment!Decision(VI. Graphical!Representations!(Outline(of(Current(Lecture((I. Deficit!and!Debt:!The!most!abused!topics!in!Economics!a. Debt!b. Deficit!II. 3!Sources!for!the!Increase!in!Debt!and!Deficit!III. Who!Owns!the!Debt?!IV. !Ownership!of!the!Debt!V. Burden!of!the!Debt!Current(Lecture!1. Debt:!An!amount!of!mon ey!borrowed!by!one!party!from!anoth er.!2. Deficit:!The!amoun t!by!which !expenses!exceed!income!or!costs!ou tstrip!revenues.!a. Most!of!the!revenue!for!the!Government!comes!from!taxes.!b. If!Government!spending!is!greater!than!revenue!(Taxes)!=!Deficit/Debt!c. If!revenue!(Taxes)!is!greater!than!Government!spending!=!Surplus!3. 3!Sources!for!the!Increase!in!Debt/Defici t!a. Wars!b. Recession!c. Tax!Cuts!i. To!make!judgments!about!Debt/Deficits,!it!has!to!be!compared!to!income/GDP!output.!4. Who!Owns!the!Debt?!a. The!national!debt!creates!as!much!wealth!for!bondholders!as!liabilities!for!the!government.!b. Liability:!an!obligation!to!make!future!payment;!debt.!!!((((((ECON(104(((11th(Edition(! !c. Asset:!Anything!having!exchange!value!in!the!market!place;!wealth.!5. Ownership!of!Debt!a. Foreigners!!b. Federal!Reserve!c. Federal!Agencies!d. Social!Security!e. State!and!Local!Governments!f. Private!Sector!i. 72%!of!the!National!Debt!is!internal!ii. Internal!Debt:!US!Government!Debt!6. Burden!of!the!Debt!a. The!debt!has!historically!been!refinanced!i. Refinancing:!The!issuance!of!new!debt!in!payment!of!debt!issued!earlier!b. Most!debt!servicing!is!simply!a!redistribution!of!income!from!taxpayers!to!bondholders.!i. Debt!Service:!The!interest!required!to!be!paid!each!year!on!outstanding!debt.!c. Opportunity!Costs!are!incurred!only!when!real!resources!(factors!of!production!are!used).!d. The!true!burden!of!the!debt!is!the!opportunity!costs!of!the!activities!financed!by!the!debt.!i.


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UMass Amherst ECON 104 - Chapter 9: Debt and Deficit

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