Impact of federal deficits

Dianne Keenan and Mark Maier from Economics Live! Learning Economics the Collaborative Way
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project


Based on a fable about King Big Debt, students analyze four endings that summarize the possible impact of government debt: crowding out, Keynesian stimulus spending, external debt and monetized debt.

Learning Goals

Federal deficit, crowding out, monetized debt, external debt, deficit spending

Context for Use

Appropriate for introductory macroeconomics course

Description and Teaching Materials

  • Divide class into teams of 2 - 5 students each. Distribute one copy of readings (Fable Start and Fable Endings) to each student.
  • Read the story introduction, or ask a student read it. Point out that even though it is a fable, the economics is quite sophisticated: King Big Debt finances government spending through borrowing by offering competitive interest rates.
  • Ask students to take turns reading each ending one at time. While listening, students should identify significant events that indicate the best label to describe the ending. Students should agree on the label for the ending and why it is best before moving on to the next ending.
  • Check with groups when they have identified the four endings to make certain that they are correct. Then ask students to work together on the follow-up questions.
King Big Debt introduction
Fable start (Acrobat (PDF) 77kB Aug15 12)
King big debt part 2
Fable endings (Acrobat (PDF) 63kB Aug15 12)
Follow-up questions (Microsoft Word 20kB Jul29 12)

Teaching Notes and Tips

It is important for students to take their time analyzing each fable ending. Rather than simply aim for the correct answers, students should be able to explain how the answer represents the identified ending.

  • One way to slow students down and also engage each student in the group, is to require students to take turns reading the endings.
  • Also, require students to underline phrases in the ending that demonstrate its underlying theory.
  • When all groups have identified the endings, call on students to report which phrases they underlined to demonstrate the underlying theory.


Based on the activity, should be able to identify which theories about government deficits apply to the current US economy.

The followup questions can be used for assessment:

1. Which ending is most inflationary?

2. Which do you think would have the most negative effects on the economy? Why?

3. Which ending most closely resembles the U.S. economy today? Why?

References and Resources