SBM 4E Financial Management

1
SBM 4E Financial Management

• Understanding the Federal Budget

2
Give one reason why the national gross debt will
continue to increase in the future even if there
are several years of net surplus.

• Entitlement spending will increase dramatically
  as retiring "baby boomers" start collecting
• Social Security
• Medicare benefits.

3
Briefly describe the two main categories of
federal spending.

• Mandatory expenses, which include interest on the
  debt and entitlements
• Discretionary spending, including spending for
  national defense and education.

4
How does the government borrow money from the
public?

• The government borrows money from the public by
  selling
• Treasury bills
• Notes
• Bonds to investors.

5
If you wanted to start a small business that
manufactures widgets, give examples of the kinds
of outlays there would be 2 that are in your
control and 2 that are to some extent out of your
control.

• Controllable outlays salaries, benefits,
  insurance, security
• Uncontrollable outlays rent (or mortgage), power
  (electricity, gas)

6
Explain one way the government can increase the
yearly net surplus in the budget.

• Net surplus can be increased by
• cutting entitlement or discretionary spending
• by large tax increases

7
Briefly explain the difference between the gross
deficit and the gross debt.

• The gross deficit is the sum of the net deficit
  and the money borrowed from trust funds.
• The gross debt is the total amount the government
  has borrowed from the public and the trust funds.

8
Give two examples of federal discretionary
spending.

• Discretionary spending includes
• spending for national defense
• scientific research.

9
What would be an example of discretionary
spending for a company such as the Wonderful
Widget Company?

• Advertising
• Security
• Employee bonuses or incentives.

10
Example 1

• U.S. Federal Budget summary for 1994 and 1995
  (all amounts in billions)
• Calculate the interest rate paid on the debt in
  1995.

232 / 4644 0.0499
0.0499 5
11
Example 2

• Calculate the change in the gross debt from 1994
  to 1995. What is the net deficit for 1995? Which
  is the amount the government must repay?

277 billion 164 billion. The government
must repay 277 billion.
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Example 3

• In 2000 the federal debt was 6 trillion. If
  there were 69 million people under the age of 18,
  what was the federal debt per person in the age
  group?
• 6,000,000,000,000 / 69,000,000
• 86,957

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Example 4

• Assume that the budget balances each year so the
  national debt does not increase. If the
  government could raise 90 million per week in a
  national lottery and all of this money goes
  toward reducing the national debt, when will the
  debt be retired? Use the 2000 gross debt of 6
  trillion.
• 6,000,000,000,000 / 90,000,000
• 1282 years

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Homework

• 4E s 2, 3, 5, 6, 8, 9, 11 - 18, 24 - 26
• You must show all work to receive credit !!!