Impact of Fiscal Policy - Budget Surpluses and Deficits

December-11-08
9:03 AM

Budget Surplus

- Surplus Budget : occurs when the government's revenues exceed their expenditures = T > G
- Budget Surplus = government revenues - government expenditures)

Budget Deficit

- Deficit Budget: occurs when the government's expenditures exceed their revenues. = G > T
- Budget deficit = government expenditures - government revenues)

GDP

- The size of a governments surplus or deficit in relation to the economy's overall GDP gives an indication
of what type of discretionary fiscal policy is an operation, as well as the built in effects of automatic
stabilizers.

Balanced Budget

Balance Budget - occurs when the government's revenues equals their expenditures. = T= G
- Is where the government's expenditure and revenues are equal

Debt

- Debt: is the total amount of money the federal owes.

- The government debt represents the sum of all its past budget deficits and any surpluses.

Surpluses

- Budget surpluses are related to discretionary fiscal policy.

- Surpluses are more likely the result of built in factors

Deficits

- Deficits sometimes indicate active expansionary policies that increase government expenditures or
reduce revenues
- Deficits come about as a result of automatic stabilizers

Fiscal Policy Guidelines

1. Annually balanced budgets

a. Is the principle that government revenues and expenditures should balance each year.
2. Cyclically Balanced Budgets
a. Is the principle that government revenues and expenditures should balance over the course of
one business cycle (which is not necessarily one fiscal year)
b. The deficits from periods of contraction should roughly equal the surpluses from periods of
expansion
3. Functional Finance
a. Is the principle that government budgets should be geared to the yearly needs of the economy
b. Policy makers should concern themselves primarily with correcting fluctuations caused by the
business cycle.

Unit 3 - Fiscal Policy Page 1