<p>It is because autonomous spending increases Y, and following the equation from the textbook higher Y means more BS.</p>
<p>To give you more details, we can start with the textbook equation;</p>
<p><span class="math-container">$$BS = tY - \bar{G} - \bar{TR}$$</span></p>
<p>Afterwards we can use that in macroeconomics, in autarky, <span class="math-container">$Y$</span> is given by;</p>
<p><span class="math-container">$$Y= C+I + G$$</span></p>
<p>In turn consumer spending <span class="math-container">$C$</span> is <span class="math-container">$C= \beta_0 + \beta_1 (1-t)Y$</span> where first term is the autonomous consumer spending, second term MPC, and last term after tax income.</p>
<p>If you plug the consumption function for <span class="math-container">$C$</span> and solve for <span class="math-container">$Y$</span> you will get;</p>
<p><span class="math-container">$$Y = \frac{1}{1-\beta_1 (1-t)} \left( \beta_0 + I +G \right)$$</span></p>
<p>The last equation shows that when <span class="math-container">$\beta_0$</span> goes up, <span class="math-container">$Y$</span> goes up. The first equation shows that when <span class="math-container">$Y$</span> goes up <span class="math-container">$BS$</span> goes up.</p>

CC BY-SA 4.0
2024-07-25T16:37:45.650Z
2024-07-25T16:37:45.650Z
Leeh Mizrahi
<p>In a very rudimentary sense, the question can be answered in the following way :
We see that 
<span class="math-container">$BS = tY - G - TR $</span></p>

<p>As you put in the quote, Dornbusch is arguing that budget deficit/ surplus is not a good measure to gauge government policy. </p>

<p>EXPLANATION: 
For example, a deficit doesn't always mean that <span class="math-container">$G$</span> is large or that the government is spending to increase income. An increase in budget deficit can occur if there is a reduction in private spending (which is <span class="math-container">$I$</span>) - since that leads to a reduction in <span class="math-container">$Y$</span>, which reduces <span class="math-container">$tY$</span> (tax collections) that increasing deficits. 
When he says that private spending can affect budget surplus, he means that private spending <span class="math-container">$I$</span> can affect the level of income <span class="math-container">$Y$</span> which can affect <span class="math-container">$tY$</span> (tax collections) which can impact Budget Deficit/Surplus. 
Hope this helps!</p>

CC BY-SA 4.0
2020-03-16T20:42:45.773Z
2020-03-17T10:33:03.647Z
2020-03-17T10:33:03.647Z
Poorvi
<p><a href="https://i.sstatic.net/G1eTh.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/G1eTh.jpg" alt="enter image description here"></a>I was reading Keynesian economics in R.Dornbusch's book where he mentioned the defects of using budget surplus as a measure where he says it can be changed and effected by autonomous private spending which I couldn't logically get.Can someone explain?</p>

CC BY-SA 4.0
2020-03-13T18:59:55.153Z
Can you please provide direct quote from the book?
1muflon1
CC BY-SA 4.0
2020-03-14T09:08:40.820Z
"However,the budget surplus by itself suffers from a serious defect as a measure of the direction of fiscal policy.The defect is that the surplus can change because changes-as seen in figure.Thus,an increase in budget deficit doesn't necessarily mean that the govt. has changed its policy in an attempt to increase the level of income."
(I've pasted the figure in the main question part)
Veb
<macroeconomics><economic-growth><fiscal-policy><keynesian-economics>
How can autonomous private spending change budget surplus?
Veb
# How can autonomous private spending change budget surplus?

(Asked by: username_0 on 2020-03-13)

[![enter image description here](https://i.sstatic.net/G1eTh.jpg)](https://i.sstatic.net/G1eTh.jpg)I was reading Keynesian economics in R.Dornbusch's book where he mentioned the defects of using budget surplus as a measure where he says it can be changed and effected by autonomous private spending which I couldn't logically get.Can someone explain?

**Tags:** macroeconomics, economic-growth, fiscal-policy, keynesian-economics

> **Comments:**
> **username_1**: Can you please provide direct quote from the book?  
> **username_0**: "However,the budget surplus by itself suffers from a serious defect as a measure of the direction of fiscal policy.The defect is that the surplus can change because changes-as seen in figure.Thus,an increase in budget deficit doesn't necessarily mean that the govt. has changed its policy in an attempt to increase the level of income." (I've pasted the figure in the main question part)  

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## 2 answers

### Answer by username_2 on 2024-07-25. Score: 0

It is because autonomous spending increases Y, and following the equation from the textbook higher Y means more BS.

To give you more details, we can start with the textbook equation;

$$BS = tY - \bar{G} - \bar{TR}$$

Afterwards we can use that in macroeconomics, in autarky, $Y$ is given by;

$$Y= C+I + G$$

In turn consumer spending $C$ is $C= \beta\_0 + \beta\_1 (1-t)Y$ where first term is the autonomous consumer spending, second term MPC, and last term after tax income.

If you plug the consumption function for $C$ and solve for $Y$ you will get;

$$Y = \frac{1}{1-\beta\_1 (1-t)} \left( \beta\_0 + I +G \right)$$

The last equation shows that when $\beta\_0$ goes up, $Y$ goes up. The first equation shows that when $Y$ goes up $BS$ goes up.


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### Answer by username_3 on 2020-03-16. Score: 0

In a very rudimentary sense, the question can be answered in the following way :
We see that
$BS = tY - G - TR $

As you put in the quote, Dornbusch is arguing that budget deficit/ surplus is not a good measure to gauge government policy.

EXPLANATION:
For example, a deficit doesn't always mean that $G$ is large or that the government is spending to increase income. An increase in budget deficit can occur if there is a reduction in private spending (which is $I$) - since that leads to a reduction in $Y$, which reduces $tY$ (tax collections) that increasing deficits.
When he says that private spending can affect budget surplus, he means that private spending $I$ can affect the level of income $Y$ which can affect $tY$ (tax collections) which can impact Budget Deficit/Surplus.
Hope this helps!


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