balance budget philosphy

The 3 balance budget balancing philosophies 

• Balance annually Philosophy: G has to equal T by end of the year (G = T)

• Balance over business cycle philosophy: Balance on avaverage over time.

• Functional finance: Don’t worry about budget; focus insted on maintaining high output, and low unemployement 

Accomadating policy

Combination of fiscal and monetary policy

The government pays for an increase in G by printing money

Money supply increases

Double shift

• G goes Up, Interest rates go Up.

• MS goes Up Interest rates go Down.

Balance annually philsophy

Balance budget by the end of the year (G=T).

• If government spending is greater than tax, then before the end of the year, raise taxes and decrease spending to balance the budget.

Focuses on the budget and not the economy

Fvaors smaller government becase the impact would be smaller

Balance over the business cycle philosophy

Balance on average overtime

• During a recession run deficit: increase G or lower taxes

• During inflation run surplus: decrease G or increase taxes

Focuses on both the economy and budget

Functional finance philosophy

Don’t worry about the budget; focus instead on maintaining high output and low unemployment

Essentially the same as the business cycle philosophy

• If reccesion Increase G lower T

• If inflation decreases G raise T.

Crowding out

Governemt borrowing leads to a decrease in private sector investing

Crowding In

Government borrowing leads to an increase in private sector investing

Demand shifts right due to change in expectation