APU ECO102 Assignment 1:Deficit Spending

Assignment Instructions
Assignment
1: Deficit Spending

During
the Great Recession, like any other economic downturns, as unemployment rises,
aggregate income declines causing a major decline in tax collections. On
the other hand, with the rise in unemployment, spending on safety net programs
rise. So, there are not too many good options available to resort the health of
the national economy. It will be very difficult to defend cuts in
the federal government programs and especially the programs geared to sustain
the minimum of the standard of living for the recent “poor.” So,
government needs to increase its borrowing. Deficit spending refers to
government spending exceeding what it brings in federal income and corporate
taxes during a certain period. Deficit spending hence increases government
debt. Most economists accept that deficit spending is desirable and
necessary as part of countercyclical fiscal policy. In such a case,
government increases its borrowing and hence its deficit to compensate for the
shortfall in aggregate demand. This is derived from Keynesian economics,
and has been the mainstream economics view. Following John Maynard
Keynes, many economists recommend deficit spending to moderate or end a
recession, especially a severe one. When the economy has high unemployment, an
increase in government purchases creates a market for business output, creating
income and encouraging increases in consumer spending, which creates further
increases in the demand for business output. (This is the multiplier effect).
This raises the real gross domestic product (GDP) and the level of
employment and lowers the unemployment rate. Government borrowing under such
circumstances increases the demand for borrowing and thus pushes interest rates
up. Rising interest rates can “crowd out” (discourage) fixed private
investment spending, canceling out some of the demand stimulus arising from the
deficit

Write an
essay analyzing the advantages and disadvantages of deficit spending and the
effects of federal government borrowing on the economy i.e., the “crowding out”
effect.

Complete
this essay in a Microsoft Word document, and in APA format. Note
your submission will automatically be submitted
through “TurnItIn” for plagiarism review. Please note
that a minimum of 700 words for your essay is required.

Your paper should be structured
as follows

1.
Cover
page with a running head
2.
Introduction:
What is deficit spending and how does it work.
2.1.
Advantages
2.2.
Disadvantages
3.
Crowding-out
Effect
4.
Conclusions:
Do you believe that deficit spending helps or hinders short-term and long-term
economic growth?
5.
References