Fiscal Policy: The Federal Budget

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The fiscal policy has a basic tool which is the federal budget. The federal budget is made up of two parts: revenue which is gained through taxes and expenditures which are spending programs. When the revenue and expenditures from the federal are equal in any year, it is called balanced budget. However, it is almost never balanced and the budget is either a surplus or a deficit. Budget surplus occurs in any year when revenues exceed expenditures. Budget deficit occurs in any year when expenditures exceed revenues. When the government has a budget deficit, the government can create more money which has the possibility to cause hyperinflation which is very high inflation, or borrow money by selling bonds. Common forms of government bonds are treasury bills, treasury notes, and treasury bonds. The bonds can last from 3 months to as long as 30 years. If the government borrows wisely, then it could start more projects, and create more goods and services. If the money is borrowed incorrectly, then it will add to national debt. National debt is the amount of money that the government owes to bondholders. As long as there is budget deficit, the government will continue to borrow money…show more content…
One of the problems is that it reduces the funds available for businesses to invest. People are attracted to high interest rates and the security of investing in the government which attracts them use their savings and profits to buy bonds. However, money spend on the government is one fewer dollar for investments. Crowding-out effect is caused because of loss of funds for private investment due to government borrowing. It hurts and slows down economic growth. More investments lead to lower prices, more jobs, and overall higher standards of living. The second problem is that with a high national debt, the government has to pay interest to the bondholders. Servicing the debt has been known due to the fact that the government pays interest on

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