The consequences of budget deficits and surpluses for macroeconomic performance
A budget deficit occurs when the government spends more than it collects in tax. A surplus is the opposite. Each has distinct effects on growth, inflation, unemployment, and debt.
Formula
Budget Balance = Tax Revenue − Government Spending
Real World
The UK's post-2010 austerity programme under Chancellor George Osborne moved the government toward surplus by cutting spending, but critics argued this suppressed aggregate demand and slowed the recovery from the 2008 recession.
Exam Focus
Always consider time horizon: a deficit may boost short-run growth but crowd out private investment and raise debt-servicing costs long run.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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