ECON ASSIGN 1 - Assignment Example

Deficit spending affiliation Deficit spending Deficit spending refers to the situation whereby the government spends more than the amount allocated in the budget. The government opts to borrow large amounts of money in order to balance the rate of spending and the amount available for spending. Seater (2008) argues that the fact that the government should spend what is allocated in the budget makes deficit spending an option taken to minimize recession of any other form of financial risk a nation experiences.

Generally, deficit spending is the spending of loaned or borrowed money.Advantages In providing an example of an advantage of deficit spending, the situation after the economic recession in the United State may be appropriate. With the nation experiencing a recession and government over spending its annual allocations, the only choice that was left for survival was borrowing. The plan was effective in enabling the nation get through the recession. Another advantage of deficit spending is the fact that a nation or household is enabled to invest loan money and also benefit from the profits made from borrowing.

In an argument by Baumol (2005) deficit spending allows a nation to create investment opportunities that are not included in the budget. The author further points out that the investment has potential of repaying its debt and creating a surplus. Disadvantage Baumol (2005) points out that deficit spending put future generations in debt that they did not benefit from. Large deficits spent may take years for them to be repaid. For years, the borrowed money may be used for investment which the current government may use the profits for other financial purposes.

For this reason, the debts may be recurring for generation to generation. Deficit spending may also minimize the level o loan allocation for private organizations. Seater (2008) points out that, large borrowing from the government may reduce the rate at which investors and financial institutions offer the same services to private business entities. Crowding out effect The crowding effect refers to the creation of financial and other resources deficits after over utilization by the government.

Seater (2008) crowding out enables the government to be the only market determinant as private organizations does not have je opportunity to access financial and other resources. However, crowding out effect may also create investment opportunities in the market. The jap created by large borrowings provide an opportunity by wealthy private investor to capitalize on the situation. Conclusion In analyzing the pros and cons of deficit spending, it is an appropriate assumption that the vice has both negative and positive effects.

However, in regards to economic growth deficit speeding generates a higher potential to growth. With deficit spending a nation is provided with large chunks of financial resources that may be used in investment. Investment may be useful in the current and future generations. However, a deficit spending should be effectively managed in a way that a payment plan is created appropriately. If this is achieved, deficit spending is a positive financial practice that promotes economic growth. ReferencesBaumol, W.

& Blinder, S. (2005). Economics: Principles and Policy. Boston: Thomson South-Western. Seater, J. (2008). "Government Debt and Deficits". Indianapolis: Library of Economics and Liberty.