Some macroeconomists have argued that it would be beneficial for the government to run a deficit...

Some macroeconomists have argued that it would be beneficial for the government to run a deficit when the economy is in recession and a surplus during a boom. Does this make sense? Please explain why or why not. And if both are feasible please explain the benefits and negatives of both.

Solutions

Expert Solution

Both of the statements makes sense.

Government budget deficit in recession

During recession, economy is facing a slow-down. To overcome this, government can increase it's expenditure and can reduce the tax rates. This will shift IS curve rightwards and will boost the economy.

Benefits

1. Output, income and employment is increased.

2. Economy comes out of recession.

3. Promotes higher growth.

Demerits

1. It can increase its reliance on borrowing from foreign sources.

2. Long term fiscal deficits can sluggish the economy.

3. Confidence of people on government can reduce.

Government budget surplus in boom

During boom, economy is facing growth. To overcome this, government can decrease it's expenditure and can increase the tax rates. This will shift IS curve leftwards and will stable the economy.

Benefits

1. It stabilizes the economy.

2. It reduces the inflation in an economy.

3. It increases revenue for government which can help government to increase expenditure in future.

Demerits

1. It increases tax burden on people.

2. People might start consuming less to pay for the increased tax amount and in long run, this can hamper economic growth.

3. It can reduce aggregate demand and therefore can reduce employment, income and output.

Rahul Sunny answered 1 year ago

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