budget surplus and deficit

8/13/2019 Budget Surplus and Deficit

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Submitted by:

Disha Sharma101110014

Bharat Wadhwani - 101110042


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BUDGET SURPLUS AND DEFICIT

'Budget - An estimation of the revenue and expenses over a specified future periodof time. A budget can be made for a person, family, group of people, business,government, country, multinational organization or just about anything else thatmakes and spends money. A budget is a microeconomic concept that shows thetradeoff made when one good is exchanged for another.

'Budget Deficit - A financial situation that occurs when an entity has more money

going out than coming in. The term "budget deficit" is most commonly used to refer togovernment spending rather than business or individual spending. When it refers tofederal government spending, a budget deficit is also known as the "national debt."The opposite of a budget deficit is a budget surplus, and when inflows are equal tooutflows, the budget is said to be balanced.

'Budget Surplus - A situation in which income exceeds expenditures. The term"budget surplus" is most commonly used to refer to the financial situations ofgovernments; individuals speak of "savings" rather than a "budget surplus." A surplus isconsidered a sign that government is being run efficiently. A budget surplus might beused to pay off debt, save for the future, or to make a desired purchase that hasbeen delayed. A city government that had a surplus might use the money to makeimprovements to a run-down park, for example.


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INFLATION

The rate at which the general level of prices for goods and services is rising,and, subsequently, purchasing power is falling. Central banks attempt to stopsevere inflation, along with severe deflation, in an attempt to keep theexcessive growth of prices to a minimum.

As inflation rises, every dollar will buy a smaller percentage of a good. Forexample, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in ayear.

Most countries' central banks will try to sustain an inflation rate of 2-3%.


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INFLATIONAND BUDGET DEFICIT

The increase in government spending will increase GDP, which in turn willincrease aggregate demand in the short-run; however, in the long-run,increase in government spending will cause both demand-pull (due to excessdemand) and cost-push (due to input prices) inflation.

While the government's budget constraint is useful in showing how a permanentdeficit might be financed and in clarifying what is meant by "higher deficitpolicies lead to higher inflation," it cannot determine whether that proposition istrue. In order to determine whether a higher deficit policy can, in fact, befinanced and, if it can, whether it will lead to higher inflation, a theory of theeconomy and monetary system is required.

Exchange rates and interest rates change over a wide range to financepublic-sector borrowing. Changes in exchange rates change the relative prices

of domestic and imported goods, and some of these changes are reflected inbroad-based price levels. Fluctuations of this kind are one-time events, distinctfrom inflation defined as a persistent increase in a broad-based index of prices.


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INFLATIONAND BUDGET SURPLUS

Running a budget surplus meant the public sector was saving - its revenueexceeded its consumption spending - thus (we hope) adding to nationalsavings and thereby reducing the size of the current account deficit and theamount we needed to borrow from foreigners.

budget surplus and deficit

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