Justin Sousa 1November 21, 2016Mod 30: Long-Run Implications of Fiscal Policy: Deficits and the Public DebtThe Budget Balance as a Measure of Fiscal Policy-The budget balance is the difference between the government’s tax revenue and itsspending, both on goods and services and on government transfers, in a given year-Savings by Government Formula: SGovernment= 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 meansthere is a negative budget balance-Budget Deficit is when the government’s spending during a particular time periodexceeds that of its revenue-Expansionary Fiscal Policies include increasing government purchases of goods andservices, 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 andservices, 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 fiscalpolicy 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 budgetbalance may have quite unequal effects on the economy.a.EX: Changes in the government purchases of goods and services have agreater effect on real GDP than equal-size changes in taxes andgovernment transfers2.Often, changes in the budget balance are themselves the result, not the cause, offluctuations in the economy
