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In: Economics

Should the federal Government have a balanced budget (i.e. revenues = expenses), or is a deficit...

Should the federal Government have a balanced budget (i.e. revenues = expenses), or is a deficit –OK? What are some of the positive reasons to run a deficit?

Solutions

Expert Solution

A government should run a deficit budget and not a balanced budget because a deficit budget can act as a method to increase the demand in the economy which can result in higher growth rate, increased employment etc.

But while making a deficit budget the government should be careful to not crowd out the private investment. If the economy is at the full employment level it is better to not have a big budget deficit ar it will not have any positive effect on the demand but will crowd out the private investment. In such a case, monetary policy works better.

Positive reasons to run a deficit are:

  • Increase the demand in the economy: A budget deficit increases the demand in the economy as the government will have more resources to spend. At the time of recession, such increased demand can lead to economy coming out of recession.
  • Increase employment: An increase of the demand in the economy will lead to an increased employment in the economy.

Rahul Sunny answered 2 years ago
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