Government Fiscal Policy/Budget Deficits and the National Debt - Assignment Example

Government Fiscal Policy/Budget Deficits and the National Debt Part Government Fiscal Policy The United State experienced a severe recession between 2007 and 2009 that affected not only the U.S economy but also the entire glob. This recession made the federal government under the leadership of president Obama to come up with a stimulus package program in the year 2009. The package was commonly known as fiscal policy and it was focusing at economic stimulation via financing government project to create direct employment opportunities.

Whereby, the policy employs two major tools namely; increasing or decreasing government spending and taxes in order to achieve certain economic goals. In order to arrest the situation, the federal government utilized expansionary fiscal policy measure by increasing the levels of spending through buying securities such as; treasury bills and bonds from members of the public. This led to an increase in aggregate demand which consequently led to an increase in economic growth as well as high levels of employment (Amadeo, 2013).

This means that fiscal expansionary measure helped to close the recessionary gap as illustrated in diagram A. In addition, the federal government reduced income taxes to reduce. Connectively, the federal government further utilized transfer payment which is actually the amount of money paid to the households without working for that money (Baumol, & Blinder, 2011). Diagram A LRAS SRAS GDP Price Deflator Recessionary Gap AD Source: Author Real GDP The above diagram indicates how the stimulus package (fiscal policies) helped to stimulate economic growth and employments.

Whereby, expansionary fiscal policies such as increase in government spending, transfer pavements and taxation caused the aggregate demand curve (AD) to shift towards the right. However, if the federal government could have failed to pass the stimulus package (fiscal policy), research indicates that the recessionary gap could have widened up due to lower aggregate demand. This means that the levels of economic activity could have declined and hence, causing the levels of unemployment to escalate (Baumol, & Blinder, 2011).

Classical economic theory asserted that the economy can correct itself during recession without government intervention. This may be attributed to the law of demand and supply. Whereby, if the supply for labor or economic resources increases the prices will decline and vice versa. This means that, the economy can correct itself without government intervention. However, the above classical economics theory may work properly if factors affecting demand and supply are held constant which may not always be the case (Reuss, n.d). Connectively, fiscal policies had a significant impact on increasing the size of the budget deficits and the national debt.

This is because the stimulant package increases government spending, taxes as well as transfer payments. This means that, huge government spending caused a deficit as the federal government injects more money into the economy. In addition, reduction in household income taxes could be attributed to an increase in budget deficit. Additionally, fiscal policies may have caused an increase in both local and foreign debt because; the federal government could borrow from private sectors by asking local banks to sell bonds to them.

On the contrary, foreign debts increases as the government obtain funds from institutions such as International monetary funds and World Bank (Devereux, Choi, Devereux & International Monetary Fund, 2005). Students Responses In order to address recessionary problem, the government should have employed both fiscal and monetary policy tools. Secondly, federal government should try to provide incentives and subsidies to promote growth of local industries. This may help to address the problem of unemployment as well as promote economic growth.

Part 2: Budget Deficits and the National Debt Budget deficit may be differentiated from the nation debt in the sense that, budget deficit entails the amount of money spent by the government in excess of what has already been allotted in the budget. This means that the government tends to spend more resources than what it has. On the contrary, national debt entails the amount of money borrowed by the government from all; the sources which include but not limited to the total of both federal municipal debt.

National debts might be categorized into two major sections namely; external and internal debts. An external national debt involves the amount of money borrowed from foreign lending institutions such as World Bank and international monetary funds. On the contrary, internal debts entail the amount of money borrowed from sources located within a country (Baumol & Blinder, 2011). An increase in budget deficit will affects the future of the U.S economy by making interest rates to increase which will consequently causing an increase in recessionary gap as the level of economic activity and aggregate demand tend to be lower.

On the other hand, national debts will affect the future of the U.S economy by lowering the economic growth as well as increasing the cost of borrowing/interest rates charged. This will consequently result to another global recession if both fiscal and monetary measures are not put in place (Devereux, Choi, Devereux & International Monetary Fund, 2005). Students Response In order to prevent the problem of deficit and national debt in the future, the federal government should encourage its citizen to leave within their means.

Secondly, the government should try to strike a balance between the level of spending and resources available. Whereby, a well balanced budget should be established at the beginning of every financial year. This may help to a avoid deficits and over reliance to the national debts. References Amadeo.K. (2013).The Current U.S Federal Budget Deficit. . On 7th August 2013. Baumol, W. J., & Blinder, A. S. (2011). Macroeconomics: Principles and policy. Australia: South-Western, Cengage Learning. Devereux, M. B., Choi, W. G., Devereux, M. B., & International Monetary Fund. (2005). Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?

Washington, D.C: International Monetary Fund. Reuss.A (n.d).The General Theory and the Current Crisis Retrieved: http: //www. dollarsandsense.org/archives/2009/0809reusskeynespartIII.html.on 7th August 2013.