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ECON ASSIGN 1 - Assignment Example

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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…
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Download file to see previous pages... 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.
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.
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.
In analyzing the pros and cons of deficit spending, it is an ...Download file to see next pagesRead More
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