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Debt and long-term economic growth

Economists generally agree that high budget deficits today will reduce the growth rate of the economy in the future. Why? Do the reasons for the high budget deficit matter? In other words, does it matter whether the deficit is caused by lower taxes, increased defense spending, more job-training programs, and so on? In your analysis, what role do fiscal and monetary policies have in causing higher or lower budget deficits? How do budget deficits affect overall long-term economic growth and the debt that the U.S. has to contend with?

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A budget deficit means that the government has spend more money that it has taken in. This money is borrowed, and this drives up interest rates. Higher interest rates discourage business expansion and limit investment in infrastructure. Over time, this limits economic growth. If the deficit is caused by lower taxes the effect may be mitigated, as lower taxes encourage business growth. Job training programs could also help because a better trained workforce contributes to economic growth. Increased defense spending may offset economic slowdown temporary, but does not set the economy on a better track - the effect lasts only as long as the spending.

Expansionary fiscal policies generally cause the deficit to increase because it requires the government to inject money into the economy. Fiscal policy ...

Solution Summary

Fiscal and monetary policies and budget deficits; Debt and long-term economic growth