Answer to Question #66090 in Macroeconomics for Rubal

Question

explain why budget deficit is downward sloping.

Answer 1

The budget deficit is equivalent to G + iD – T . G and iD are such values, which don`t impact on real GDP. But real GDP changes when net tax revenues change. When real GDP rises, then transfers (such as employment insurance and welfare) fall and tax revenues rise (for a given tax rate). That`s why at the moment when real GDP begin to be more, then the overall budget deficit tends to fall. This explains the negative slope of the budget deficit function.