Jacob Economics - Week 5

In episode 9 we learn about Deficits and Debt. A deficit is when government spending exceeds its income. Debt is an accumulation of deficits. The U.S. has the largest debt at a little over 34 trillion dollars. Our GDP grows every year do to population growth and productivity increases and our ability to sustain debt grows along with our income. When a government is unable to pay its bills it's an example of default. The investors who loaned the government money lose billions, the government loses all credibility, and it causes a massive recession. The debt ceiling is the limit on the amount of national debt that can be issued by the U.S. Treasury. The debt ceiling, by itself though, does nothing to cut spending or raise revenue. Looking at the debt from the past or even the present is a good way to have political arguments, but it may not be a great way to think about the spending.

In episode 10 we learned about the Federal Reserve. The Federal Reserve, more commonly called "the FED," is the central bank of the United States. The FED has two important jobs, overseeing other banks to make sure that the banks have enough money in reserve to avoid bank runs, and to conduct monetary policy, which is increasing and decreasing the money supply. An interest rate is the price of borrowing money. The amount lent is known as the principle. When interest rates are low, borrowers will borrow more and spend more (and vice versa) The two things keeping the banking system healthy are confidence and liquidity. Liquid assets are assets that can be converted into cash quickly and with minimal impact to the price received.