Econs revision help?
The economy is currently in a boom where GDP is 800. Normally the economy would be expected to have a GDP of 700.
Is the actual government budget in a surplus, deficit or balanced? And is the fiscal policy stance expansionary, contractionary or neutral?
*From my own understanding i think its in balanced, but not sure about the fiscal policy stance though. Any help?
Answer:
It really depends on the country and the politicians that have been elected.
When an economy is growing faster than trend GDP, unemployment is usually very low, and tax receipts are very high. This would tend to lead to a budget surplus, since income is strong and expenditures on unemployment benefits and welfare are likely to be low.
If the above is true, then fiscal policy will be contractionary (lower expenditures, higher taxes).
However, some governments get greedy when tax receipts are high, and tend to spend the budget surplus. This leads to expansionary policies, as they hire more workers, build new roads, etc. etc.
We are actually defecit spending in our current budget, and have been since Bush first came into office. This is mainly due to the excessive cost of the war .
Our fiscal policy is expansionary. All the policies being passed are trying to expand the economy. Certain subgroups of the economy are contracting, like the housing market. Overall though, we are expanding.
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