The deficit equals government purchases minus net tax receipts. The deficit is positive when GDP is low, but the budget goes into surplus when GDP is sufficiently high. The deficit/surplus is the difference between the level of government purchases and the level of receipts. There is a particular level of economic activity such that the budget is exactly in balance. In our example, this level of GDP is 2,000. The deficit is zero when income is 2,000 because that is the point at which government purchases equal tax revenues. For levels of income in excess of this level of GDP, the government budget is in surplus. In Figure 14.7 “Deficit/Surplus and GDP”, we see that the budget deficit/surplus line crosses the horizontal axis when GDP is 2,000. Increases in government purchases or reductions in the tax rate are examples of expansionary fiscal policy. Decreases in government purchases or increases in the tax rate are called contractionary fiscal policy. Expansionary fiscal policy increases the deficit for a given level of real GDP. An increase in government spending shifts the deficit line upward, as shown in “Expansionary Fiscal Policy”. With a decrease in the tax rate, by contrast, the intercept stays the same, but the line rotates upward. The effect is still to increase the deficit at all positive levels of income.