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How does a government budget deficit affect the economy Essay

Identify two periods in recent history in which the United States has run budget deficits. What were the reasons for the deficits during those time periods? A government budget deficit occurs when the governments expenses exceeds its revenues. Because of this spending the government has to find alternatives to finance this added expense through borrowing. A government deficit in the long-run can reduce savings, growth, and income.

In the short-run if the economy is performing below its output potential deficits are good because it increases expenditures moving output closer to potential. Two periods in recent history when the U. S. was running on a deficit were 2000-2008 and 2008-present. Within the two time periods the country went to war adding roughly $1. 1 trillion to the national debt we also had a significant tax cut that also added to the debt by $2 trillion. There also was a recession that caused the unemployment rates to go up increasing the government spending to cover unemployment insurance.

The financial crisis of 2007-2008 was also played an important part in deficits. During this time there was a threat of collapse of large financial institutions and decline in the stock market Dow Jones lost 33. 8% of its value in 2008. The housing and auto industries suffered many companies that relied heavily on credit also suffered. Banks simply stopped trusting people to pay them back so they stopped making loans that most businesses needed to regulate their cash flows. Unfortunately this recession was not only felt in the U. S. but it also had a damaging affect too many foreign countries.


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