Paper

What are the implications of long lasting budget deficits to the United States economy caused by current aggregate demand?

AMBA 600 Section 7622

Professor Marsh

November 8, 2011

Introduction

The economic effects of a budget deficit has garnered significant attention in political and educational groups as a whole, controversial as well as long-lasting issues have been addressed yet conclusions remain mixed. This paper will provide an in-depth analysis of the prolonged consequences of a budget deficit to the US economy caused by current aggregate demand, its accompanying effects and how reducing or perhaps eliminating this deficit will either hinder or improve the economic growth in the long run.

In addition to examining the aforementioned, it will delve slightly into the topic of inflation, public and private saving and other fiscal policy aspects. The issues put forward identify with the current state of the country as it remains at a standstill in one of the worst recessions observed in decades resulting in lower living standards, skyrocketing unemployment rates and irrational government spending to make up for the current debt.

Why should a nation take its budget deficits into consideration and why is it important? This paper will seek to address this question in its entirety. According to Gale and Orszag (2004), budget deficits significantly reduce national savings which is the equivalent of private savings less the budget deficit. Henceforth, there is a direct correlation between national savings and the budget deficit; an increase or decrease in one will concurrently lead to the same effect on the other.

Finally, variations of possible ways in which a budget deficit can be significantly reduced or eliminated will be conferred. Once implemented, budget deficits should plummet in the short run. The United States federal government is solely responsible for overseeing and managing it effectively to ensure that it refrains from...