Federal Budget Deficit Could Shrink to $1 Trillion This Year

EconEye Admin

4 years ago

The U.S. budget deficit could shrink this year as federal spending on Covid-19 aid slows and the economy rebounds. The federal deficit is expected to increase over the next decade. The Fed plans multiple interest rate hikes.—cnn.com

Answer the following questions to check your understanding of the story.

What does the news clip suggest is contributing to a shrinking federal budget deficit in 2022?

The federal budget deficit is shrinking in 2022 because _____________.

a) debt interest is increasing, and transfer payments are decreasing

b) transfer payments are decreasing, and taxes are increasing

c) government expenditure on goods and services are decreasing and debt interest is increasing

d) government expenditures on goods and services are decreasing and taxes are increasing

The federal budget deficit shrinks when outlays decrease and receipts increase. What is the outlay that the news clip indicates has decreased? What is the receipt that the news clip indicates has increased?

The federal budget deficit shrinks when outlays decrease and receipts increase. Federal spending on Covid-19 aid is a transfer payment, which is included in outlays. As the economy rebounds, incomes increase, and taxes increase. Tax revenue is included in receipts. So, the federal budget deficit is shrinking because outlays are decreasing, and receipts are increasing.

What is the effect of an increasing government budget deficit over the next decade on U.S. investment and economic growth?

An increasing government budget deficit ______________.

a) decreases investment, but has no effect on economic growth

b) increases investment, but has no effect on economic growth

c) increases investment and encourages economic growth

d) decreases investment and slows economic growth

An increasing government budget deficit increases the demand for loanable funds. The real interest rate rises. What is the effect of a higher real interest rate on investment? How does investment contribute toward economic growth?

An increasing government budget deficit creates a crowding-out effect, which decreases investment. And a decrease in investment slows economic growth.

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