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
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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
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Savings by Government Formula: S
Government
= T - G - TR
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T:
Value of Tax Revenues
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G:
Government Purchases of Goods and Services
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TR:
Value of Government Transfers
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A budget surplus indicates a positive budget balance, while a budget shortage means
there is a negative budget balance
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Budget Deficit is when the government’s spending during a particular time period
exceeds that of its revenue
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Expansionary Fiscal Policies include increasing government purchases of goods and
services, higher government transfers, and lower taxes
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These decrease a budget surplus or increase a budget deficit
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Contractionary Fiscal Policies include reducing government purchases of goods and
services, lowering government transfers, or higher taxes
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These increase the budget surplus or decrease the budget deficit
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Economists use changes in the budget balance as a way to assess whether current fiscal
policy is expansionary or contractionary
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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
