NOTE We dont include transfer payments in G because transfer payments are not

Note we dont include transfer payments in g because

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NOTE – We don't include transfer payments in G because transfer payments are not spending on goods and services. Technically speaking T should include revenue from all sources (not just tax revenue), but mentally you could just of it as being T = T R T P , where T R is tax revenue and T P transfer payments (do bear in mind, however, that the government can technically make revenue from other sources, which technically should be included in here). One other point to note here is that, in the context of the multiplier model at least, tax revenue depends on income (i.e. tY ) where t is MRT Balanced Government Budget: G = T Government Budget Deficit: G > T Government Budget Surplus: G < T Paradox of Thrift – A paradox of economics stating that if a single individual consumes less, their savings will increase, but if everyone saves less, the result may be lower savings overall NOTE – An attempt by people in the economy, as a whole, to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of AD such as government spending). The outcome is a reduction in AD which ultimately leads to lower income and thus potentially lower savings Fallacy of Composition – Mistaken inference that what is true of a subset must be true of the superset e.g. what is true of a household must be true of the entire economy NOTE – The paradox of thrift is basically a type of this, and is often used as an argument for government activity in the form of automatic stablisers and even discretionary fiscal policy as well, because the budget deficit created by such behaviour is predicted to be solved when the economy starts growing again and the government is earning excess tax revenue Cyclical Budget Position – The budget position in the short term. It is based on fluctuations in tax revenue and government expenditure, in accordance with the economic cycle and the operation of automatic stabilisers NOTE – This is because tax revenues will likely rise in booms (more people in higher income tax brackets) and government spending on benefits will fall in booms (due to lower unemployment), which has the tendency to lead to budget surpluses. The opposite happens in a recession, and so the tendency would be for the government to be running a budget deficit during a recession Structural Budget Position – The budget position in the long term. It is the budget position that exists regardless of the stage of the economic cycle, due to the workings of discretionary fiscal policy NOTE – If a country is running a budget deficit of 5% (of GDP) through ‘good’ times and then that budget deficit worsens to 9% during a recession, it could be said that the government is running a structural budget deficit of 5%, but a cyclical deficit of 4% (9% - 5% = 4%). Similar logic could be used for a country that has a budget surplus during ‘bad’ times Austerity Policy – A policy where a government tries to improve its budgetary position in a recession by increasing its saving NOTE – T G

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