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13 May, 2015 - 10:20

Since the automatic stabilizer of nondiscretionary fiscal policy creates deficits and surpluses which are insufficient, the size of the needed additional policy action must be determined. This is done with the help of the full employment budget, which calculates what would have been the budget surplus or deficit had the economy been at full employment.

During the period 1970-1980, the American budget was in deficit. During this period of time, because of high rates of unemployment in the middle 1970's and early 1980's, the full-employment budget was in surplus (because had the unemployed worked in those years, the taxes they would have paid would have been larger than the spending). Thus, even greater actual budget deficits could have been defended.