Budget Deficit Definition and How It Affects the Economy

Only available on StudyMode
  • Download(s) : 292
  • Published : November 23, 2012
Open Document
Text Preview
How does a government budget deficit affect the economy? 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’s budget deficit occurs when the amount of money going out exceeds the amount of money coming in and is defined as a shortfall of revenues under payment. For example say the amount of taxes being collected is $500,000 but the amount of government spending is $7000,000 the government has a deficit of $200,000. Governments often fund these deficits with the sale of bonds; this sale is an IOU to the buyer and a promise for repayment in the future. In an effort to make up for the deficit and the increase in the nations debt the government might increase taxes and interest rates; this affects the economy in a negative way by decreasing the amount of money consumers have to spend on goods and services. A chain creation may occrue decreasing demand causing supply to also fall.

During the years of 1981 to 1989 the deficit within the U.S. government drove up the amount of debt held by the public by almost triple. Ronald Reagan increased the amount of money the government was spending on the military but also decreased taxes. With no ability to fund the military spending the government experienced a deficit and borrowed money, which increased the public debt. The same was true for the Bush administration, as the cost of two wars increased and the amount of tax breaks also increasing the amount of tax revenue decreased. In an effort to pay for the nations wars the government increased the borrowing and drove up the publics debt to 40% of the nations GDP. Of course the largest increase in the nations deficit has come in the last three years, the nations wars and economic stimulus has, in the way of increased spending, increased the nations deficit and caused the nations debt to rise to &15.5 trillion or 63% of the nations GDP.
tracking img