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Deficit Spending - Essay Example

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Summary
Within the realms of macroeconomics, deficit financing is one of the turnkey variables that help in balancing the monetary flow in any modern economy neutralizing generated deficiencies. It is basically a mechanism that remains in the hands of the government of economies for…
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Deficit Spending
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Deficit Spending

Download file to see previous pages... Deficit financing has many advantages that benefit the economy in times of economic trouble but it has many disadvantages and overemphasis on it may turn hazardous for the economy.
In a modern economy, budget deficit often evolve due to some common reasons like increase in government expenditure, fall in aggregate income level, inefficiency in the tax collection mechanism, subsidies granted by government in diverse sectors of the economy and so on. All these results in diminished pool of the state exchequer causing budget deficit wherein the mechanism of budget deficit by the government make its intervention coming with its own set of advantages. As discussed earlier, with two major tools like borrowing and printing new currency, the economy experiences development in infrastructure with capital infusion which in turn propels productivity boom in essential sectors like education, medicine and real estate to name a few. Money supply within the economy increases that as a spillover effect increase price level (although inflation acts as a predicament) of the economy that fetches gains to the producers in the supply side luring investments. One of the major advantages of deficit financing is that it increases the aggregate demand within the economy increasing employment opportunities, income and thus more investments (Hajela, 2010, p. 348).
After analyzing the advantages of deficit financing, it can be stated that there are some disadvantages of it as well. Inflation is one of the most prominent disadvantage or evil effects of deficit financing. If deficit financing cannot be controlled in a proper manner then inflationary pressure will increase. As for instance, in case of production owing to excess capacity deficiency, discrepancies between demand and supply of goods within the market and shortage of complementary factors coupled with increase in money supply accelerates inflationary pressure. Apart from that some ...Download file to see next pagesRead More
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