Final answer:
The correct term for the government's use of budget deficits or surpluses to influence economic output is fiscal policy. This approach aims to manage economic cycles and stimulate long-term growth, although sustained deficits can lead to economic issues such as crowding out private investment and inflation.
Step-by-step explanation:
The government's use of budget deficits or surpluses to influence the economy is known as fiscal policy. By altering spending and taxing levels, the government aims to manage economic fluctuations, aiming to stabilize inflation, control unemployment, and influence the overall economic output. Fiscal policy plays a pivotal role not only in addressing immediate economic issues such as recessions but also in shaping long-term growth patterns.
When the government runs a deficit, it means that its spending exceeds its revenues. Continuous deficits can have significant impacts, such as crowding out private investment, which can slow economic growth, cause inflation, and create dependence on foreign financial investment. In contrast, a surplus occurs when the government's revenues exceed its spending, potentially freeing up resources for private investment but also potentially slowing down the economy if not managed carefully.