What is a Budget Deficit?
- Cccurs when government expenditures exceed revenues from taxes and other sources.
- Public savings are also referred to as budget surplus. When public savings are negative, the government is said to be running a budget deficit.
- Increase aggregate demand
- Boost the economy during a recession
- Increase government spending
- Fiscal policy
- Higher taxes in the future
- Higher interest rates and bond yields
Ricardian Equivalence Theory
- Argues that using budget deficit or borrowing to stimulate the economy exerts no effect.
Crowding Out Theory
- An increase in government spending and borrowing leads to a decrease in investments from the private sector.