Balanced budget

From Wikipedia, the free encyclopedia

This article does not cite any references or sources. Please help improve this
article by adding citations to reliable sources.Unverifiable material may be challenged
and removed. (September 2007)
From a Keynesian point of view, a balanced budget in the public sector is achieved when the government equates
the revenues with expenditure over the business cycles. In other words, a government's budget is balanced if its
income is equal to its expenditure. This allows for a deficit in periods of low economic prospects that however needs
to be matched by asurplus in periods of high economic activity.
[edit]Balanced Budget Multiplier
Because of the multiplier effect, it is possible to change aggregate demand (Y) keeping a balanced budget. The
Government increases its expenditures (G), balancing it by an increase in taxes (T). Since only part of the money
taken away from households would have actually been used in the economy, the change in consumption expenditure
will be smaller than the change in taxes. Therefore the money which would have been saved by households is
instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced
budget will change aggregate demand by an amount equal to the change in spending.







A balanced budget occurs when the Federal deficit = $0. Taxes paid to the government = government spending. The
government neither adds money to, nor subtracts money from, the economy. If state and local governments,
businesses and private individuals do not add money to the economy, the total amount of money in the economy
remains static.
When the total amount of money in the economy remains static, the smallest inflation reduces the real value of
money in the economy. Example: Assume the total amount of money in an economy were $100 trillion and inflation
were only 3%. If no new money were created via federal deficit spending, the total real value of federal money in
the economy would fall $3 trillion.
After five years, the real value of federal money in the economy would be only $86 trillion -- a $14 trillion drop!
[edit]See also