THE FULL EMPLOYMENT SURPLUS OR DEFICIT

THE FULL EMPLOYMENT SURPLUS OR DEFICIT - balanced budget or...

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SECTION 26: THE FULL EMPLOYMENT SURPLUS OR DEFICIT
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THE FULL EMPLOYMENT SURPLUS OR DEFICIT Economists argue that a more meaningful way to measure the impact of fiscal policy is to compare the actual level of government spending with the level of taxes that would be collected if the economy operated at full employment. This is called the FULL EMPLOYMENT SURPLUS OR DEFICIT.
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Instead of calculating the actual surplus or deficit in any year, calculate what the surplus or deficit would have been if the economy operated at full employment
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EXAMPLE: Suppose the economy is in a massive recession. Tax revenue will be very low. The government will probably have a large deficit.
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If the economy was at full employment, GDP would be higher and tax revenue would be higher Also, government spending might be lower because unemployment compensation and welfare spending would be lower Thus, at full employment, the government might have a
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Unformatted text preview: balanced budget or a surplus CONCLUSION: When an economy is in a recession, it is not necessarily fair to criticize a government for having a budget deficit. EXAMPLE: THE FULL EMPLOYMENT BUDGET FOR 1933 If the economy had achieved full employment during 1933, tax revenue would have been much higher. Given the actual level of government spending in 1933, there would have been a gigantic surplus. Thus, the actual fiscal policy used during 1933 was not expansionary There would have been a surplus at full employment Thus, the actual fiscal policy could be considered to be contractionary. Minority view We should have an annually balanced budget Majority view We should try to balance the budget over the business cycle Have surpluses during good years and deficits during bad years Majority view: Pursuing full employment without inflation is more important than achieving a balanced budget...
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