FopePrancis
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What is a budget deficit and a budget surplus, and how does the government use these two factors of the fiscal policy to either deflate or expand the economy?
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samss22
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(Original post by FopePrancis)
What is a budget deficit and a budget surplus, and how does the government use these two factors of the fiscal policy to either deflate or expand the economy?
Budget deficit is when government spending exceeds government revenue (from taxation). Budget surplus is when government revenue exceeds government spending.

To expand the economy, the government increase spending/decrease taxes (which either increases spending or decreases revenue, which worsens the deficit) to increase AD and increase real GDP.

To contract the economy during periods of Boom, the government decrease spending/increase taxation (which either decreases spending or increases revenue hence a budget surplus/budget deficit improves). This will cause AD to decrease as consumption and govt spending falls leading to deflationary pressure.

It's not a factor of fiscal policy, rather it's a feature or a consequence as a result of the implementation of fiscal policy.
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FopePrancis
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(Original post by samss22)
Budget deficit is when government spending exceeds government revenue (from taxation). Budget surplus is when government revenue exceeds government spending.

To expand the economy, the government increase spending/decrease taxes (which either increases spending or decreases revenue, which worsens the deficit) to increase AD and increase real GDP.

To contract the economy during periods of Boom, the government decrease spending/increase taxation (which either decreases spending or increases revenue hence a budget surplus/budget deficit improves). This will cause AD to decrease as consumption and govt spending falls leading to deflationary pressure.

It's not a factor of fiscal policy, rather it's a feature or a consequence as a result of the implementation of fiscal policy.
Thank you so much, this helped significantly!
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