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Unformatted text preview: Deficits, the Budget Surplus Graph, and the Balanced Budget Amendment B S = t Y - G - TR < 0 Deficits > 0 Surpluses BS Y Y FE Structural Surplus Deficits Surpluses +- The Budget Surplus graph above makes the point that whether the Government’s budget is in deficit or surplus depends upon the level of Y in the economy. In order to understand this we simplify the budget by making revenues equal to tY which is the marginal tax rate times Y (Y is the tax base). Tax revenue is equal to the tax rate times the tax base. Tax revenue is “Endogenous” because it depends in the graph on the level of Y. We further simplify by assuming that Government spending is constant and consists of purchases of goods and services (G) and transfer payments (TR). The Government’s annual budget position is always calculated as revenues minus spending. If that number is positive the government has a surplus for the fiscal year (October 1 st through Sept 30 th ). If the number is negative we have a deficit. 1 Fiscal policy involves using Government spending and taxing to affect the economy in a way that furthers our macroeconomic goals such as full employment, economic growth, and price stability. In evaluating fiscal policy, we are interested in knowing if it has served to contract or expand aggregate demand. If the Government budget is in surplus for the year then fiscal policy is “Contractionary ”. If the budget is in surplus then revenues exceed spending and the Government has taken more dollars out of the economy than it has...
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This note was uploaded on 04/04/2012 for the course ECON 200H taught by Professor Staff during the Winter '11 term at Ohio State.
- Winter '11