Answer to Question #37454 in Macroeconomics for jeyam

Question

is the budget 2014 an expansionary or contrationary budget? give your evidence for your answer?

Answer 1

Answer on Question#37454 - Economics - Macroeconomics
This isn’t a “spending” expansionary budget, it’s a contractionary one.
Basic macro analysis. First derivative of demand side identity:
ΔY = ΔC + ΔI + ΔG + ΔNX
Since ΔG (the budget deficit) is negative, the impact on ΔY is also negative. This isn’t a “spending” expansionary budget, it’s a contractionary one. Moreso since the main cuts appear to be on public investment which has a higher multiplier. Note: what they spend on is actually not relevant from this point of view. Only the changes matter.