Chapter 14, Problem 5P

To determine

Concept introduction:

Budget Deficit: Budget deficit is the excess of federal government expenditure over its receipts during a year.

Public Debt: Public debt is a measure of the debt owed by the federal government to its creditors.

Answer:

Gross public debt is defined as a measure of the debt owed by the federal government to its creditors, both public and federal government agencies.

Net public debt is a measure of the debt owed by the federal government to its creditors, excluding federal government agencies.

Explanation:

When the federal government faces a budget deficit, it borrows from the public and other federal government agencies to meet the deficit. It does so by issuing Treasury bills, notes and bonds, known as debt securities, to them. Thus, the public and the federal government agencies, which hold these debt securities, become the federal government’s creditors. Gross public debt is a measure of the total debt owed by the federal government to these creditors.

The amount that the federal government borrows from federal government agencies, such as the Social Security Administration, is called intra-government debt. The debt securities held by these agencies are the debt of the federal government and at the same time, the assets of these agencies. Hence, they constitute debt that the government owes to itself. Therefore, they are not taken into account while calculating the net public debt. Thus, the net public debt is a measure of the total debt owed by the federal government to its creditors, excluding federal government agencies.