Balanced budget: Definition from Answers.com

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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. It is a budget in which revenues are equal to spending. ^[1]

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.

$Y_1 = c_0 + c_1 \left ( Y - T \right ) + I + G$

$Y_1 = \frac {1} {1 - c_1} \left ( c_0 + I + G - c_1 T \right )$

$G = G + \alpha \,$

$T = T + \alpha \,$

$Y_2 = \frac {1} {1 - c_1} \left ( c_0 + I + \left ( G + \alpha \right ) - c_1 \left ( T + \alpha \right ) \right )$

$\Delta Y = Y_2 - Y_1 = \frac {\alpha} {1 - c_1} \left ( 1 - c_1 \right ) = \alpha$

$\Delta T - \Delta G = \alpha - \alpha = 0 \,$

References

^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 376,403. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.

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		WordNet. WordNet 1.7.1 Copyright © 2001 by Princeton University. All rights reserved. Read more
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Balanced budget

Balanced Budget Multiplier

References

See also