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Economy - Essay Example

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An accumulation of the government deficits for a country over a number of periods eventually become government debt i.e. negative government…
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Economy

Download file to see previous pages... The government debt increases due to budget deficits do no good but instead create complex problems for the economy and it drags the economy further away from growth. This is especially in the case of under developed economies as they are worse-off by such a situation. On the other hand, developed countries do have a cushion against such problems and endure the effects by strictly controlling the inflation through monetary policy.
In case of developing economies, they have lesser reserves to back their position, while being more productive they still run continuous deficits (Charles, 1995). This invokes further activity, owing to the fact that the economy is below its potential output but usually is not managed adequately and thus results in demand pull or cost push inflation in different circumstances and hence these developing countries are seldom able to reap the benefits of their economic activity.
The budget deficits are rooted from the time of the great depression of 1930s which was witnessed by and had strong influence on many economies worldwide before the Second World War though there were numerous reasons for the Great Depression beginning in 1929, including not only the structural weaknesses but also a series of certain other events.
The declining demand in the economy laid down pressures on government and whilst they had to manage the decline in economic activity, the government expenditures eventually increased to accommodate these problems thus putting burdens over the budgets and eventually running deficits (Bernanke, 2007). Another reason stated had been the decline in international trade thus affecting many countries of the world whose economy depended on the international transactions. As stated by one of the famous analysts, the chain of events proceeded as follows (Fisher, 1933):
Thus when the free hand didn’t work out, government started to play a pivotal role in the economic activity for the ...Download file to see next pagesRead More
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