One of Keynes’s main ideas in The General Theory of Employment, Interest and Money was that government fiscal policy should be used to stabilise the level of output and employment.
Through changes in its expenditure and taxes, the government attempts to increase output and income and seeks to stabilise the ups and downs in the economy. In the process, fiscal policy creates –
- a surplus (when total receipts exceed expenditure) or
- a deficit budget (when total expenditure exceed receipts) or
- a balanced budget (when expenditure equals receipts).
The government directly affects the level of equilibrium income in two specific ways – government purchases of goods and services (G) increase aggregate demand and taxes, and transfers affect the relation between income (Y) and disposable income (YD) – the income available for consumption and saving with the households.
Bibliography : NCERT – Introductory Macroeconomics