Respuesta :
The federal budget is the difference between the income of the government and its expenditure as illustrated in the GDP.
How to explain the information?
The income of the government is tax revenue and when expenditure is more than the income, the budget is said to be in deficit. Potential GDP is the maximum GDP that an economy is able to produce with the given level of resources in the long run. In times of recession, the actual GDP is less than the potential GDP, which means the output produced is less than the capability of the economy.
Inn such periods, GDP is low, unemployment is very high and aggregate demand is also very low. When the economy is in recession, the income of the people falls and thus, the tax they pay out of their incomes also falls. Therefore, the tax receipts fall due to a fall in income.
On the other hand, in recessions, the government uses expansionary fiscal policy which directly injects money by either increasing government spending or reducing the tax rate. Therefore, when the tax rate falls, the tax revenue or tax receipts fall. The government spends money on the public to increase social welfare.
The budget of the government is the difference between tax receipts and transfer payments. When the tax receipts fall and transfer payments rise. Thus, the budget of the government falls and the federal budget is said to be in deficit.
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