Quiz 27: Keynesian Economics and Islm Analysis


Budget requires forecast of the economy: Government expenditure through budget is to generate maximum employment opportunities and achieve stable economic growth.If an economy falls in to recession, then the government needs to spend more to generate more employment opportunities and also needs to provide unemployment benefits. In contrast, during inflationary condition, government needs to control its spending; otherwise, it will contribute to the existing inflation. Therefore, before planning for budget, it needs to forecast the economic condition of the country so that budget allocation will not harm the economy. If some of the factors like growth in GDP and rate of inflation are not forecasted, then the actual figure will be more or less the forecasted figure; hence, the government spending and its revenue will mismatch.

Reasons for U.S Government to deal with three budgets at a time: The drafting process of U.S budget is a very difficult task. Hence, the executives deal with three budgets at a time.At first, executives focus on the current budget which has been implemented for the current fiscal year to achieve maximum goals. Meanwhile, the executives have to present the proposed budget for the upcoming fiscal year before various congress committees to examine thoroughly to avoid missing any issue from the proposed list. At last, they simultaneously prepare a draft proposal for the next year fiscal budget when the president's proposed budget goes to the congress committees for thoroughly examining all aspects.

a.Decision-making lag: The drafted budget moves to the various congress committees for approval; unless the committees are satisfied, the draft will not be approved. Hence, the decision maker will keep modifying the draft. As a result, it takes much time in implementing a program; hence, this process is a kind of decision-making lag. b.An implementation lag: Allocation of budget cannot ignore some crucial issues like social security, healthcare, social welfare, and environment. The committees have limited control over the budget allocation because of some entitlement programs. Since most of the federal expenses are based on the existing law, any change or modification in entitlement programs needs a change in the guidelines. Therefore, there is an implementation lag in the budget. c.Decision-making lag : An overly detailed budget refers to an attempt to provide maximum benefits to the supporters by the ruling party. It takes much time for implementation or reallocation of budget over the various programs. Hence, political intention to favor the supporters takes more time to implement a program, which causes decision-making lag in the budget.

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