ScienceGuy

Is government debt a problem? There are two parts to a question of government debt:  1. Deficit 2. Debt The deficit matters as it adds to the stock of debt. Questions about the sustainability of government debt are expressed as a ratio to GDP (national income) Government debt is the accumulation of current and past deficits. Debt owned by government equals stock of bonds B(t). The budget deficit is the difference between expenditures, which includes any interest on the debt it owes, and its receipts (mostly from tax) The first term is the real interest paid on government bonds in circulation. G(t) is the government spending on goods and services in year t . T(t) are taxes less transfers in year t . The difference between (G-T) is known as the primary deficit.  This equation tells us that the change in the debt ratio is equal to the sum of two terms: 1. The first is the difference between the real interest rate and the rate of growth of GDP, multiplied by the debt

EXPECTATIONS IN AS -  INFLATION We have already incorporated expectations of the price level into the model. These took 2 forms, adaptive (backwards-looking) and rational (we use our knowledge of the macroeconomy to work out how current decisions will affect prices). Inflation expectations can be measured in two ways: 1. From surveys of consumers and firms 2. Comparing the yields on nominal bonds with that on real government bonds of the same maturity.  Bonds differ in two basic dimensions: 1. Default risk: the risk that the issuer of the bond will not pay back the full amount promised by the bond. 2. Maturity: the length of time over which the bond promises to make payments to the holder. Bonds of different maturities each have a price and an associated interest rate called yield to maturity or simply the yield. The relation between maturity and the yield is called the yield curve. The yield curve tells us what interest rates are expected to be in the future. An upward

As we had seen, in the short and medium run fluctuations (shocks and policy changes) dominate. In the long-run capital accumulation and technological change dominates. In the very long run, technological change dominates.  Growth is related to the rate of change of per capita GDP over a long period of time. "Economic growth" is often used generically to refer to increases in living standards. Looking across countries, we want to know how much higher the standard of living is in one country than in another. Thus, the variable we want to focus on and compare either over time or across countries is output per person rather than output itself. The growth rate of GDP per capita in the US is constant over the long run at 1.9% per annum. What matters for peoples welfare is their consumption rather than their income. One might, therefore, want to use consumption per person rather than output per person as a measure of the standard of living. Because the ratio of consumption t

The openness of the economy has three distinct dimensions: 1. Openness in the goods market: Free trade restrictions include tariffs and quotas. 2. Openness in the financial market: Capital controls place restrictions on the ownership of foreign assets 3. Openness in factor markets: The ability of firms to choose where to locate production, and workers to choose where to work. The EU is the biggest ever common market among sovereign countries, with 27 member states. We will concentrate on the implications for the control of the macroeconomy of free trade in goods and financial markets. OPENNESS IN GOODS MARKETS By this, we mean the exports and imports of goods and services. The rising share of exports and imports in GDP is a sign of openness. Domestic consumers must decide not only how much to consume and save but also whether to buy domestic or foreign goods. Their decision depends on,  (a) Their level of income, imports are correlated with domestic income and, (b) It