Mod 30_ Long-Run Implications of Fiscal Policy_ Deficits and the Public Debt .docx - Justin Sousa 1 Mod 30 Long-Run Implications of Fiscal Policy

Mod 30_ Long-Run Implications of Fiscal Policy_ Deficits and the Public Debt .docx

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Justin Sousa 1 November 21, 2016 Mod 30: Long-Run Implications of Fiscal Policy: Deficits and the Public Debt The Budget Balance as a Measure of Fiscal Policy - The budget balance is the difference between the government’s tax revenue and its spending, both on goods and services and on government transfers, in a given year - Savings by Government Formula: S Government = T - G - TR - T: Value of Tax Revenues - G: Government Purchases of Goods and Services - TR: Value of Government Transfers - A budget surplus indicates a positive budget balance, while a budget shortage means there is a negative budget balance - Budget Deficit is when the government’s spending during a particular time period exceeds that of its revenue - Expansionary Fiscal Policies include increasing government purchases of goods and services, higher government transfers, and lower taxes - These decrease a budget surplus or increase a budget deficit - Contractionary Fiscal Policies include reducing government purchases of goods and services, lowering government transfers, or higher taxes - These increase the budget surplus or decrease the budget deficit - Economists use changes in the budget balance as a way to assess whether current fiscal policy is expansionary or contractionary - However, there are two reasons as to why this method could be misleading: 1. Two different changes in fiscal policy that have equal-size effects on the budget balance may have quite unequal effects on the economy. a. EX: Changes in the government purchases of goods and services have a greater effect on real GDP than equal-size changes in taxes and government transfers 2. Often, changes in the budget balance are themselves the result, not the cause, of fluctuations in the economy
Justin Sousa 2 November 21, 2016

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