Effects of Long-Term Deficit Spending - 1687 Words

The Effects of Long-term Deficit Spending ECO 203 Prof. Kristian Morales October 3, 2011 The Effects of Long-term Deficit Spending In times of hardship, economist Maynard Keynes noted that the federal government not only has a responsibility to help revive the economy, but is often the only solution when a recession grows deep enough. He argued that the basic problem of a severe recession is a lack of investment on the part of business despite low interest rates. The answer when neither business nor consumers are able to awaken the economy is that the government needs to step in and encourage investment through borrowing and spending. Government spending can reactivate a dull economy and spur on new investment and growth.†¦show more content†¦Keynesian economists believe that growth-oriented, or expansionary, fiscal policy is necessary in a recession because private sector investing and consumption drops. Expansionary fiscal policy can directly create jobs and economic activity by injecting money into the economy through either government spending or a reduction in taxes. To do this, the government mus t often spend more that current revenues from taxes. In this case, government deficit spending is necessary to maintain a reasonable level of economic activity. This is where monetary policy comes in. Monetary policy attempts to create the money needed by the federal government without increasing inflation as a result of increasing the money supply through securities sales. Both monetary and fiscal policy can act to increase or decrease the deficit. Under normal circumstances, economic downturns are corrected by government deficit spending; then the deficit is paid down through surpluses during the eventual economic recovery. Expansionary monetary policies help increase the money supply, lowering interest rates and encouraging investment and economic growth, while expansionary fiscal policies attempt to encourage private sector investment and consumption through tax cuts and government spending. Contractionary policies â€Å"pay the piper†, so to speak, by decreasing the mone y supply and reducing government spending or increasing taxes to pay down the debt incurred during the recession. TheShow MoreRelatedShort And Long Term Effects Of Deficit Spending863 Words   |  4 Pagesworks of deficit spending, including how it is used correctly and others used incorrectly. Other area will be relating to the advantages and disadvantages of deficit spending from a bigger picture instead of smaller things to look for. Another part of discussion within this essay will be the crowding-out effect; including the layout of the definition and also understanding in simplest terms for the report. Last area will include the discussion of short and long term effects of deficit spending. VariousRead MoreDeficit Spending During The Great Depression768 Words   |  4 PagesDeficit Spending During the Great Depression, many people tried to save money and were spending less. Businesses produce less, unemployment rises and household incomes decline. There are few options available to reverse the effects of a recession on the economy. One specific option is deficit spending. Deficit spending is a government tool used to address serious economic issues. Deficit spending refers to government spending that exceeds federal income and taxes over a period of time. The governmentRead MoreGreat Recession and Deficit Spending688 Words   |  3 PagesGreat Recession Deficit spending Deficit spending refers to the extent at which the government expenditure exceeds revenue over the financial period. This is the opposite of budget surplus. We may apply the term to an individual, private company or government budget (Brux, 2011). Advantages An economic downturn automatically paves way to a decline in taxation and an increase in government spending. This causes deficit. Nevertheless, if the government tries to reverse the situation by increasingRead MoreThe Effects Of Deficit Spending On The United States899 Words   |  4 Pagesfollow a similar path and spend more money than it earns. Deficit spending in the United States comes with some advantages, disadvantages, and strong criticism. Some feel deficit spending is good for getting the economy back in motion while others contend it does nothing for the economy. The effects of deficit spending are carefully examined to determine if the United States is improving or degrading the future of the economy. Deficit spending will occur when the government or even a business spendsRead MoreThe Deficit Spending On The Country s Economy803 Words   |  4 Pagesunderstand deficit spending think about it in simpler terms, like, the budgeting of your check book. If you have $100.00 but want to spend $200.00 you will need to make the decision: do you not make the purchase or do you borrow the money by maybe using credit? A consideration to remember is how borrowing that money will have an effect on your overall budget. Not only will you have the initial $100.00 difference to repay but also the interest that goes along with repaying that money. Deficit spending isRead MoreUsing the Data and Your Economic Knowledge, Assess the View That a Reduction in Income Tax Is the Best Way to Improve the Performance of the Uk Economy in Both the Short Run and Long Run.1282 Words   |  6 Pagestackle these certain goals, for example fiscal and monetary policy. Fiscal is a change in government spending or taxation, an example of fiscal policy is to reduce taxation and thus give consumers more spending power, hopefully increasing economic activity. Monetary policy is centred on interest rates, for example reducing interest rates to give consumers less incentive to save and thus increase spending and demand in the economy. These policies each have their own positives and negatives and thus usuallyRead MoreMacroeconomic as/Ad Framework1687 Words   |  7 PagesAS/AD   framework   to   show   the   separate   effects   on   GDP,   inflation   and   public   sector   borrowing  on  any  single  national  economy  of:   a) cut  in  public  spending   b) an  increase  in  the  rate  of  VAT  (sales  tax)   c) a  slowdown  in  the  GDP  growth  of  less  developed  economies.   (Make  sure  that  you  include  clear  and  appropriate  diagrams  for  this  question)      Accordingà ‚  to  Begg  and  Ward  (2009)  fiscal  policy  is  the  government’s  decisions  regarding  taxation   and   spending   to   influence   level   of   demand   for  Read MoreSolution Of Debt Crises And Long Term Effects1618 Words   |  7 PagesCrises and long term effects (10 points) 2. Thorough discussion of budget deficits and potential solutions (10 points) 3. Thorough discussion of trade deficits and potential solutions (5 points) 4. Thorough discussion of political obstacles to potential solutions (5 points) 5. Discussion of solutions impacts on the macro economy (10 points) 6. Spelling, Grammar, and Style (10 points) The U.S national debt crisis is an issue that must be moderated. In the long term, the debtRead MoreWhat Is Fiscal Multiplier?920 Words   |  4 Pagesto incur incredibly high yearly deficits leading to a debt level that is getting out of control. In nominal terms, the recent debt and deficit levels are by far the highest the U.S. has ever experienced. In terms of percentage of GDP, debt and deficit levels are higher than they have ever been in a time of relative peace in U.S. history. With the U.S. not currently involved in a major war or crisis, it is economically unsustainable to continue running these deficit levels. This is the most importantRead MoreNational Debt Is Not Always A Bad Thing1695 Words   |  7 Pagesfunds, it issues Treasury bonds; these are IOUs of the federal government. In other words, the national debt is a stock of IOUs created by annual deficit flows. (Schiller 261) With the help of research and my economics class, I have learned that having national debt is not always a bad thing. For example, the financial crisis of 2008-2009 and the effects it had on the economy and people was horrible. However, I learned that if it weren t for the increase in government borrowing by bailing out banks