KW_Macro_Ch_12_Sec_03_The_Budget_Balance - chapter 12 >...

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>> Fiscal Policy Section 3: The Budget Balance chapter 12 Headlines about the government’s budget tend to focus on just one point: whether the government is running a surplus or a deficit and, in either case, how big. People usually think of surpluses as good: when the federal government ran a record surplus in 2000, many people regarded it as a cause for celebration. Conversely, people usu- ally think of deficits as bad: when the federal government ran a record deficit in 2004, many people regarded it as a cause for concern, and the White House promised to bring the deficit down over time. How do surpluses and deficits fit into the analysis of fiscal policy? Are deficits ever a good thing and surpluses a bad thing? Let’s look at the causes and consequences of surpluses and deficits. The Budget Balance as a Measure of Fiscal Policy What do we mean by surpluses and deficits? The budget balance, which we defined in Chapter 9, is the difference between the government’s income, in the form of tax rev-
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CHAPTER 12 SECTION 3: THE BUDGET BALANCE enue, and its spending, both on goods and services and on government transfers, in a given year. That is, the budget balance is equal to government savings and is defined by Equation 12-2: (12-2) S Government = T G TR where T is the value of tax revenues, G is government purcases and TR is the value of government transfers. As we learned in Chapter 9, a budget surplus is a positive budg- et balance and a budget deficit is a negative budget balance. Other things equal, expansionary fiscal policies—increased government purchases of goods and services, higher government transfers, or lower taxes—reduce the budg- et balance for that year. That is, expansionary fiscal policies make a budget surplus smaller or a budget deficit bigger. Conversely, contractionary fiscal policies—reduced government purchases of goods and services, lower government transfers, or higher taxes—increase the budget balance for that year, making a budget surplus bigger or a budget deficit smaller. You might think this means that changes in the budget balance can be used to measure fiscal policy. In fact, economists often do just that: they use changes in the budget balance as a “quick-and-dirty” way to assess whether current fiscal policy is expansionary or contractionary. But they always keep in mind two reasons this quick- and-dirty approach is sometimes misleading: Two different changes in fiscal policy that have equal effects on the budget balance may have quite unequal effects on aggregate demand. As we have already seen, changes in government purchases have a larger effect on aggregate demand than equal-sized changes in taxes and government transfers.
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_12_Sec_03_The_Budget_Balance - chapter 12 >...

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