Principles of Principles of MacroeconomicsMacroeconomics

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Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes““The Federal Government’s Budget Constraint”The Federal Government’s Budget Constraint”

卜安吉卜安吉

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Interest rates to Zero %Interest rates to Zero %

http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&hp

So now the Fed must use OTHER ways to “ease” credit conditions!

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The Government Budget The Government Budget ConstraintConstraint

The Constraint The Constraint AbbreviationsAbbreviations

G is Government G is Government SpendingSpending

T is Tax Revenue IncomeT is Tax Revenue Income Bonds is NEWLY Issued Bonds is NEWLY Issued

BondsBonds MMss is Printed Money is Printed Money

The U.S. Budget

http://www.gpoaccess.gov/usbudget/index.html

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The Government Budget The Government Budget ConstraintConstraint

The ConstraintThe Constraint

G - T = G - T = Bonds + Bonds + MMss

The U.S. Budget

http://www.gpoaccess.gov/usbudget/index.html

You may not use this formula

on the test – use the words!

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Government SpendingGovernment Spending

Government expenditures are Government expenditures are required of all governments. required of all governments.

Everything provided by the “public” Everything provided by the “public” sector of the economy.sector of the economy.

Salaries of government employees, Salaries of government employees, bridges, guns, roads, water pipes, bridges, guns, roads, water pipes, sewage pipes and maintenance, sewage pipes and maintenance, defense, etc.defense, etc.

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Tax Revenue IncomeTax Revenue Income

Tax revenue includes any fees, Tax revenue includes any fees, assessments or taxes collected by the assessments or taxes collected by the government.government.

Income taxes, utility taxes or revenue Income taxes, utility taxes or revenue collections, tolls for highways, fees for collections, tolls for highways, fees for park entrance, sales taxes, property taxes, park entrance, sales taxes, property taxes, etc.etc.

http://www.irs.gov/

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U.S. Treasury Bills, Notes, and U.S. Treasury Bills, Notes, and BondsBonds

Debt or borrowing of the government.Debt or borrowing of the government.

The U.S. has the lowest cost of The U.S. has the lowest cost of borrowing, that is the least risk or lowest borrowing, that is the least risk or lowest interest rate due to the lack of default interest rate due to the lack of default risk.risk.

NEW borrowing – not debt issued to NEW borrowing – not debt issued to cover bonds maturing which need cover bonds maturing which need refinancing.refinancing.

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Change in the Money Supply Change in the Money Supply

Commonly called Commonly called “Printing Money”“Printing Money”

When the Federal When the Federal Reserve Prints Reserve Prints currency to currency to specifically buy bonds.specifically buy bonds.

Federal Reserve Notes A Liability of the Fed

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Spending versus taxes Spending versus taxes

Taxes – paid todayTaxes – paid today Bonds – taxes tomorrow Bonds – taxes tomorrow

(when the bonds mature)(when the bonds mature) Printing money leads to Printing money leads to

inflationinflation Inflation tax - $ worth lessInflation tax - $ worth less

Federal Reserve Notes A Liability of the Fed

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LIBORLIBOR Investopedia explains Investopedia explains London Interbank London Interbank

Offered Rate - LIBOROffered Rate - LIBOR in plain english... in plain english... The LIBOR is the world's most widely used The LIBOR is the world's most widely used

benchmark for short-term interest rates. It's benchmark for short-term interest rates. It's important because it is the rate at which the important because it is the rate at which the world's most preferred borrowers are able to world's most preferred borrowers are able to borrow money. It is also the rate upon which borrow money. It is also the rate upon which rates for less preferred borrowers are based. rates for less preferred borrowers are based. For example, a multinational For example, a multinational corporation with a very good credit rating corporation with a very good credit rating may be able to borrow money for one year may be able to borrow money for one year at LIBOR plus four or five points. at LIBOR plus four or five points. 

http://www.investopedia.com/terms/l/libor.asp