Impact of Budget Deficit Policy

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I. Introduction With an outline development goal who will achieved through the policy of macro economy is in order to reach the level of unemployment is low gainful price stability, economic growth as expected and distribution income it equal. To achieve development goal the government allocated to finance through budget state that are arranged every year. One of the fiscal policies implemented that related to the budget is a budget deficit, a policy which the state revenues are less than the state expenditure. To overcome the lack of revenues, effected by way of debt owed, whether sourced from domestic and abroad, issued a bond, or by printing money (Seignior age). Indonesia there has been a change in the policy of state revenues and…show more content…
So, government spending derived from debt at this point is equivalent to that tax cuts is funded from debt not affect the consumption (Mankiw, 2007). Research about inflation is based on Inflation Theory. One of the famous inflation theory is the Quantity Theory that inflation can occur when there is increase the amount of money in circulation and the public's expectations of price increases in the future. Research on the impact of inflation to employment rate is based on Phillips Curve Theori, that said when the unemployment rate is high, the inflation rate is low, and vice versa, if the unemployment rate is low, then the inflation rate is high. III. Literature Review Research on the impact of budget deficits policy to inflation has been done a lot, including research that conducted by Darrat (1985) using data from the United States in the 1960s , and the results showed that the growth of money and the budget deficit policy in the U.S. affects inflation . In these studies, Darrat using OLS (Ordinary Least Square) analysis techniques. Another study conducted by Metin (1998 ) to explore the budget deficit policy in Turkey by using data in 1950-1987 and using the OLS analysis techniques , the results showed that the budget deficit significantly influence inflation in Turkey. Further research conducted by Darrat ( 2000) is the budget deficit policy in Egypt using data in 1957-1993 and uses technical analysis of the ECM
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