In week four, we discussed how deficits, surpluses, and debt in relation to the macroeconomic health of the United States.
A government deficit is when federal spending is greater that the tax revenue received for that year. Each year the deficit is added to the current debt, the Treasury must sell bonds to raise the money to cover deficit. At first, the deficit spending does boost economic growth. As we have read in the previous weeks, government spending does have a positive effect on the economy; it lowers interest rates, increasing the money supply available, and creates jobs, which lowers the unemployment rate. However, if the deficit is added to the national debt this is very damaging to the economy because the government can let the value of the U.S. dollar fall, this would make the debt repayment cheaper and less expensive. This will have a negative effect on foreign government and how investors view the strength of our Treasury bonds, and they will be reluctant to purchase Treasury bonds, this will cause an increase in the interest rates. When creditors become concerned about a country's ability to repay its debt, they demand a higher interest rate to provide a greater return on this higher risk investment. Treasury bills, notes and bonds are used to finance budget deficits, if foreign government and investors do not purchase them, the U.S. will have difficulty raising money to continue to finance the deficit
On the other hand, a budget surplus is the opposite of a budget deficit. A budget surplus occurs when government has an excess of revenue. When the government runs a budget surplus, the additional funds are spent to lower the national debt. The funds are also used to increase national savings, increase lending and decrease interest rates to improve investments. A budget surplus can also slow down the growth of the economy.
We also