ECON 102 APU Effects of Deficit Spending in the Economy Research paper

User Generated

abggvatunznavgen

Economics

Econ 102

American public univeristy

Description

Assignment 1: Deficit Spending

During the Great Recession, like any other economic downturn, as unemployment rises, aggregate income declines causing a major decline in tax collections. On the other hand, with the rise in unemployment, spending on safety net programs rise. So, there are not too many good options available to resort the health of the national economy. It will be very difficult to defend cuts in the federal government programs and especially the programs geared to sustain the minimum of the standard of living for the recent “poor.” So, government needs to increase its borrowing. Deficit spending refers to government spending exceeding what it brings in federal income and corporate taxes during a certain period. Deficit spending hence increases government debt. Many economists accept that deficit spending is desirable and necessary as part of countercyclical fiscal policy. In such a case, government increases its borrowing and hence its deficit to compensate for the shortfall in aggregate demand. This is derived from Keynesian economics, and has been the mainstream economics view. Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output (this is the multiplier effect). This raises the real gross domestic product (GDP) and the level of employment and lowers the unemployment rate. Government borrowing under such circumstances increases the demand for borrowing and thus pushes interest rates up. Rising interest rates can "crowd out" (discourage) fixed private investment spending, canceling out some of the demand stimulus arising from the deficit

Write an essay analyzing the advantages and disadvantages of deficit spending and the effects of federal government borrowing on the economy i.e., the “crowding out” effect.

Complete this essay in a Microsoft Word document, and in APA format. Note your submission will automatically be submitted through "TurnItIn" for plagiarism review. Please note that a minimum of 700 words for your essay is required.

Your paper must be structured as follows

1.Cover page with a running head

2.Introduction: What is deficit spending and how does it work?

2.1. What are the advantages of deficit spending?

2.2. What are the disadvantages of deficit spending?

3. What is the crowding-out effect and how does it work?

4.Conclusions: Do you believe that deficit spending helps or hinders short-term and long-term economic growth? How? Why?

5.References

Explanation & Answer:
3 pages
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Here you go!

EFFECTS OF DEFICIT SPENDING

Effects of Deficit Spending in the Economy
Name
Course
Professor
Date

EFFECTS OF DEFICIT SPENDING

Introduction
Deficit spending is defined as the amount by which government spending exceeds
revenues during a fiscal period, causing a budget deficit in the process (Chen, 2020). This is also
known as an intentional excess that is meant to stimulate the economy in some way and increase
its growth, which is why this excess spending can be thought of as an investment. This concept
was first coined by British economist, John Maynard Keynes. He had written in his book entitled
The General Theory of Employment, Interest and Employment that a decrease in consumer
spending can be balanced out by an increase in government spending in an attempt to stabilize an
economy and avoid the underwater consequences of recession.
Keynes goes on and expands on the benefits of deficit spending by mentioning the
prevalence of the “Multiplier Effect.” This theory believes that the amount of additional deficit...


Anonymous
I was stuck on this subject and a friend recommended Studypool. I'm so glad I checked it out!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Related Tags