The Pros And Cons Of The National Debt

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Before I address the question posed in this assignment as to why would the actual national debt figure be considered less informative about the state of an economy than the national debt as a proportion of GDP, I will first provide detail as to my understanding of what the national debt actually is and what it means to the citizens of the country in which they reside, in this case, the United States.
The Federal Government generates a budget surplus which is a condition where revenue exceeds expenditures. On the other hand, the Federal Government generates a budget deficit when it is in the red or more specifically, whenever it has more money in output than input. In order to make up the discrepancy and continue to sustain governmental
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The National Debt is the net accumulation of the government’s annual budget deficits. The National Debt directly affects most people in several ways. Here are some examples; the Treasury Department will increase the yields on treasury securities in order to draw new investors, this will reduce tax income the government can spend because most of it goes towards paying interest on the national debt. Soon, the act of borrowing becomes increasingly ¬¬¬complex. As the rate offered on treasury securities increases, businesses are viewed as riskier which also causes an increase in the yield on new bonds, as a result, corporations have to raise their prices to meet the augmented cost of their debt, therefore, consumers pay more and inflation results. As the yield on treasury securities increases, the price of buying a home also increases because mortgage lending is direct¬¬ly tied to short-term interest rates set by the Federal Reserve. When interest rates increase, they cause home prices to drop due to the inability of buyers being able to afford larger mortgages, when this occurs homeowners see …show more content…
According to Rittenberg, L., & Tregarthen; “During the recession of 1990–1991. Real GDP fell 1.6% from the peak to the trough of that recession. The reduction in economic activity automatically reduced tax payments, reducing the impact of the downturn on disposable personal income. Furthermore, the reduction in incomes increased transfer payment spending, boosting disposable personal income further. Real disposable personal income thus fell by only 0.9% during the 2001 recession, a much smaller percentage than the reduction in real GDP.” Rittenberg, L., & Tregarthen, T. D. (2008). We can see in this example that this type of fiscal policy would imply that rising transfer payments and taxes which are decreased significantly are extremely helpful to households in that they would minimize the impact of a recession and keep real GDP from falling much lower otherwise. This is indicative of the national debt not being reflective of the actual state of an economy due to stabilizers not being accounted

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