Purchase Solution

Effects of a government budget deficit

Not what you're looking for?

Ask Custom Question

1. What is a government budget deficit? How does a federal budget deficit affect the economy? How does it affect the level of investment and interest rates? How does it affect the individual consumer? Give at least three examples in your response.

2. Are unions good or bad for the economy? How do unions at GM and Ford affect employment levels and wages? How do unions affect other industries in terms of employment and wage levels?

Purchase this Solution
Solution Summary

Examples of the effects of budget deficits; pros and cons of unions.

Solution Preview

Governments, like people, can spend more than they earn, and finance it through debt. In general, the economy does better when there is a deficit. Avoiding one generally means increasing taxes, which causes a decline in spending and therefore GDP. However, when deficits occur year after year, they accumulate into a debt that can cause problems. This is why government debts are not the same as consumer debt. Government debt can crowl out private investment through higher interest rates. For example, if current interest rates are 6% and the government needs to sell bonds it will offer a higher rate in order to make them appealing. This may drive up interest rates to 7%. Private companies may not be able to afford to pay interest on their debt at this level, so would put off making capital improvements. Thus the government can reduce the level of investment by private firms in this way. This has long term implications, as future productivity depends on current investment levels.

In addition, higher interest rates attract foreign investment, ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Challenges for America: The Ever-Increasing Budget Deficit

    The paper tempts to provide arguments for and against budget deficit and investigates the effects of freezing government spending on unemployment and Consumer Price Index (CPI).

  • Deficits and Surpluses: Aspects

    The negative effect of budget deficit is that government has to borrow at higher rates and this can crowd out private investment; there will be future debt burden because of the deficit, higher taxes, and increase in the cost of government investment.

  • expansionary acts

    "unified budget" surplus is a fiscally irresponsible accounting fiction, rather than a real surplus which can be responsibly re-allocated. The Stabilization Deficit -- total deficit minus the Policy-Budget Deficit.

  • Current and projected budget deficit

    Do you support Bush's economic policy to further cut tax and run the Federal government through borrowing (budget deficit)? What are the effects of the current tax policy on US businesses in the short-run and in the long-run?

  • Public Budgeting and Government Policies

    As it is a fundamental fact, in the sound development of any nation, grants given by the federal government plays a significant role.

  • Relation Between Fiscal and Monetary Policy

    If the budget deficit is increasing and the central bank decides to increase money supply it will have two effects. One increasing budget deficit implies that the government spending is rising: and hence AD is rising.

  • Problem sets/policy questions

    What would be the effect of a 500 increase in taxes once all the rounds of the multiplier process are complete? 20. Assume the government cuts its purchases by $150 billion.

  • Budget and effect on economy

    447231 Budget and effect on economy Name effects of the current budget of the nation on the economy. This is a question that could have so many answers and go into so many different aspects of the financial industry and the government's budget.

  • Requiring states to run balanced budgets

    Suppose all states were committed to a balanced budget philosophy and the economy moved into a recession. What effects would this philosophy have on the size of the federal deficit?

  • federal deficit

    46151 Federal Budget's effects To reduce the federal deficit, the government would have to cut back on government purchase, transfer payments, and/or increase taxes. How does the federal deficit affect GDP and the multiplier?

View More Related Solutions