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Principles of Macroeconomics – Fiscal Policy (Lecture 10.2)

Principles of Macroeconomics – Fiscal Policy (Lecture 10.2)

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Principles of Macroeconomics – Fiscal Policy (Lecture 10.2) Australian fiscal policy is based on a medium-term framework designed to ensure budget balance over the cycle. Budget Government should have either a deficit or surplus debt. Deficit G > T, this increases debt. Surplus G < T, this decreases debt. Balance G = T. Debt and deficit are NOT the same thing. o Deficit is a flow over a period of time on how much spending has exceeded income. o Debt is how much a person owes at a point of time. With a positive output gap where AD has shifted to the right, government spending will decrease with taxation increasing. This may also increase surplus. This is known as a contractionary budget, which would in turn reduce AD eventually. With a negative output gap where AD has shifted to the left, government spending will increase with taxation decreasing. This is known an expansionary budget to simulate the economy, which increases deficit. In turn, AD will increase eventually. The multiplier effect also comes into play as there is also a reduction or increase in consumption with the government spending. Multipliers
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Government expenditure in model is on goods and services. It is NOT government expenditure on welfare. Doesn’t include employer benefits or pensions as it is a transfer payment. If it is not spent, it has no effect on AE. Remember there is a multiplier effect when government spending. When the government creates more income, it creates more consumers spending at the same time. As government spending increases, AE increases as well, thus increasing real GDP.
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