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lorenz d asked in Social ScienceEconomics · 1 decade ago

How can Budget deficits affect the economy?

I read that Budget deficits are good for the economy if they were used for government social services, is this always the case?

3 Answers

  • 1 decade ago
    Favorite Answer

    The government can use the budget deficit as demand management, this in turn will help improve the lives of people by pushing the economy back towards full employment (Macro Theory).

    Real autonomous expenditure is composed of four elements: capitalist consumption, capitalist investment, government budget deficit and the export surplus.

    Increasing any of these four elements "can" increase the level of effective demand for labor and move the economy towards full employment.

    Example: Consider the governments budget deficit, BD. Faced with a economy in recession, the government can increase its deficit expenditure (total expenditures over tax revenues) to pull the economy out of recession. If BD increases ceteris paribus, real autonomous expenditures increase and this shifts the effective labor demand curve to the right. This new level of employment can be a new level of full employment or some level very close to it.

    Its important to note that for the government expenditure to function as a effective instrument against recessions, the government needs to run a deficit. If the government increases taxes all the way to cover its increased expenditures, thereby leaving the budget balanced then this action will not manage to shift the effective labor demand curve and hence will not move the economy out of recession. So the government action must result in the creation of new purchasing power in the economy.

    So you can see by increasing the deficit in turn increasing the purchasing power of the dollar, the wealth is spread out, leading to a positive impact on consumers and producers. This also would likely shift the economy towards full employment and out of recession ceteris paribus and further help out society.

    You can also see that increasing the budget deficit and taxes in a manner to wash the new debt would lead to a situation where employment remains stagnant and the economy stays in a recessionary enviorment, this would also likely lower the real wage.

    Source(s): Economist
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  • 1 decade ago

    Well if you look at this: You'll find it's a worse economy.

    Just to prove that's not an isolated web site, look at this:

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  • Anonymous
    1 decade ago


    no its nt always true !!



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