High Budget Deficits and the Growth of the Economy in the Future Term Paper

High Budget Deficits and the Growth of the Economy in the Future - Term Paper Example High budget deficits are usually needed when the economy needs a boost or it may have been in a recession. In my opinion, this is a vital move as a recession can damage an economy if it lasts for several quarters. 2 Firstly due to the budget deficit, government spending will increase. Government spending is a component of aggregate demand. Aggregate demand is defined as the total demand for all goods and services within the economy.3 It consists of Consumer spending, investment, government spending and exports, and imports. Therefore when demand aggregate increases as shown in the diagram, the price rises from r0 to r1. Therefore in the short run, we will be internationally uncompetitive in regards to prices. Therefore other countries will benefit and take our buyers. In addition to this, we will become more dependent on other countries for certain goods and services.4 This is because when we become uncompetitive on a certain good or service, we will eventually stop making it. Conseq uently, we will worsen our current account by increasing our imports. Imports are defined as goods and services that are made outside the country while exports are sold outside our country from us. As a result, our economy will not grow to as much as it can as it will lose a large amount of its export market. However, the multiplier should be taken into consideration as it will affect the magnitude of the increase in aggregate demand. Overall this is known as demand-pull inflation. Increasing government spending may cause a budget deficit but it also has some benefits. For example, the government may choose to create jobs in certain areas. Therefore these people may no longer be relying on the government for money. This seems to reduce government spending in the form of benefits. As a result, that type of money can be put to better use such as children’s education or investments. Furthermore, jobs are created so people have more consumer spending. Consumer spending is defined as the amount of spending spent by each household. Consumer spending is the largest portion of aggregate demand. Also if taxes are lowered then people have more money to spend. When people spend money the shops make the profit. Profit can either be given to shareholders or it can be invested. Now in the short run prices will rise. However if firms invest carefully and on the right things, then prices can be reduced. Firms can spend money on new machinery or training programmes for workers.5 By doing this it will reduce their production costs and lowers the prices of goods and services. As a result, we will be more internationally competitive and will be able to export a lot more goods and services. As the diagram shows that investment shifts the aggregate supply curve to the right, cause the prices levels to fall from Pt to Po. In addition output increases. High Budget deficits entail the characteristics of the fiscal policy. High government spending and lowering taxes causes budge t deficits.