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Assignment 1: Deficit Spending
the Great Recession, like any other economic downturns, 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. Most
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
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.
this essay in a Microsoft Word document, APA formatted and then submits
it to ""TurnItIn"" for plagiarism review. Please note that a minimum of
500 words for your essay is required.
Your paper should be structured as follows
1. Cover page with a running head
2. Introduction: What is deficit spending and how does it work.
3. Crowding-out Effect
4. Conclusions: Do you believe that deficit spending helps or hinders short-term and long-term economic growth?
Solution ID:393769 | This paper was updated on 26-Nov-2015Price : $30