Question 66: Why Do Deficits Persist During The Expansion

Question 66why Do Deficits Persist Even During The Expansionary Phas

Question 6. 6. Why do deficits persist even during the expansionary phase of the business cycle? (Points : 1) Keynesian fiscal policy political difficulties in cutting government spending high taxes steadily growing defense spending the trade deficit increases the budget deficit

Question 7. 7. In the Keynesian model, employment (Points : 1) is determined by output. is determined by price level. determines the level of output. depends on aggregate supply. is independent of output.

Question 8. 8. The national debt is a burden on future generations if (Points : 1) it is larger than the one for which the current generation is responsible. it was incurred to put idle resources to work. borrowing reduced productive investment and future economic growth. debt holders are wealthier than the average taxpayer. the future generation is smaller than the present generation.

Question 9. 9. A structural deficit (Points : 1) is the part of the deficit due to being in recession. disappears when the economy reaches full-employment. is the part of the deficit that would persist even at full-employment output. is the result of congressional changes in the budget sent to Congress by the President. is equal to the deficit other than the part accounted for by the surplus or deficit in the Social Security trust funds.

Question 10. 10. The measure that shows how much of the deficit is due to a downturn in economic activity is (Points : 1) the structural deficit. the real deficit. the actual deficit the cyclical deficit. the budget deficit excluding Social Security accounts. Question 2. 2. If the equilibrium level of national income is less than the desired level of national income, then (Points : 1) the economy may be experiencing a rising price level. there will be an export surplus. a recessionary gap exists. there is full employment. _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown _.unknown

Paper For Above instruction

The persistence of deficits even during the expansionary phases of the business cycle remains a critical issue in fiscal policy analysis. Despite the economic growth that characterizes expansion, budget deficits often continue due to a confluence of structural, policy, and external factors. Keynesian fiscal policy, which advocates for government intervention, notably influences this phenomenon. Governments may continue to run deficits because of deliberate policy choices aimed at stimulating demand, even when economic output is rising. Political difficulties in cutting government spending further compound the persistence of deficits; policymakers often face opposition or logistical challenges in reducing expenditures during times of economic expansion. High taxes, which might otherwise help reduce deficits, are often maintained or increased for political reasons or to fund expanding welfare states. Additionally, steadily growing defense spending contributes to persistent deficits, as military commitments and security concerns sustain high expenditure levels regardless of economic conditions. The trade deficit also has a significant impact by increasing the overall budget deficit, as imports surpass exports and lead to capital outflows, necessitating borrowing that adds to the national debt.

In the Keynesian framework, employment is fundamentally determined by output, rather than by price levels or solely aggregate supply factors. Keynesians emphasize that fluctuations in aggregate demand directly influence employment levels. When demand is high, firms increase output and hire more workers; conversely, during downturns, employment falls. This perspective underscores why deficits persist—they are often employed as tools to stabilize output and employment, particularly during periods of economic slowdown, but can also be maintained during expansion due to policy inertia or political considerations. Furthermore, the concept of the national debt highlights intergenerational equity concerns; a large national debt might burden future generations if it exceeds the capacity of the economy to pay it down without detriment. The debt incurred to utilize idle resources can stimulate growth but also risks reducing future productive investments if overused, creating long-term constraints on economic growth and wealth distribution.

Understanding the nature of the structural deficit provides insight into fiscal sustainability. Unlike cyclical deficits, which arise from economic fluctuations and tend to narrow during full employment, structural deficits persist regardless of economic cycles, indicating underlying balance sheet issues within fiscal policy. These deficits result from long-term policy choices, such as entitlement commitments and tax policies, which may require reforms for fiscal sustainability. The cyclical deficit, in contrast, expands during downturns when revenues decline and receives automatic stabilizers, such as unemployment benefits, which increase during recessions. Conversely, during periods of economic growth and at full employment, cyclical deficits typically diminish. Accurately measuring how much of the overall deficit stems from economic downturns versus structural issues helps policymakers craft effective responses.

When the equilibrium level of national income falls short of the desired level, a recessionary gap exists, indicating underutilized resources and unemployment. In such cases, expansionary fiscal policy—such as increased government spending or tax cuts—is often employed to boost demand and close the gap. This aligns with Keynesian principles, which advocate for active government intervention during economic slack. If left unaddressed, this gap can lead to lower output, higher unemployment, and less income for households, adversely affecting standards of living. The interplay between fiscal policy, economic growth, and employment demonstrates the importance of timely actions to stabilize macroeconomic conditions and promote sustained economic prosperity.

References

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