IOUSA answers.docx

IOUSA answers.docx - 1 Do deficits matter Is this a real...

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1. Do deficits matter? Is this a real problem? A deficit is the amount by which expenses exceeds income, the difference between cash inflows and outflows. Citizens do not realize why this is a big problem because it doesn´t show consequences in the short-term. According to many mainstream economists who were influenced heavily by Keynesian ideas, deficit spending during recessions helps jumpstart the economy due to the multiplier effect. This government spending can add jobs, giving previously unemployed people money to spend on goods and services, improving the overall economy. However deficits are not without problems. Borrowing money and spending what you do not have is a very risky thing to do. Deficits devalue currency and invite loose monetary policy (low interest rates), which can increase inflationary pressures, and boost demand for imports, leaving the country at in increasing trade deficit. Domestically, deficits can cause a crowding out of private investment due to the increased government borrowing which raises interest rates, making it more expensive for private sector investment. Foreign ownership of domestic debt adds a political dimension of dependency on ‘the kindness of strangers’ to sustain deficits longer term which can influence foreign policy and trade policy amongst other issues exemplified by the US against Britain and France during th e Suez Crisis. 2. What is meant by the U.S. facing four different deficits: Budget, Leadership, Trade & Savings? The movie I.O.U.S.A divided the US national debt into four deficit categories: the federal budget deficit, the savings deficit, the trade deficit, and the leadership deficit. David Walker, former Comptroller General of the United States explained, “together these deficits have serious implications for our future role in the world, our future standard of living, our future domestic tranquillity, and even out future national security” (I.O.U.S.A. movie). The federal budget deficit is a result of the over spending of the federal government on goods and services that exceed the tax revenues it collects. The huge deficit is a culmination of large tax cuts, costly wars, lack of effective budget controls, and a weakened economy. This deficit is expected to increase greatly due to increased entitlement spending that will eventually exceed the amount of tax revenues the government receives. The government continues to spend money it does not have and the future of America is at stake. Eventually this debt will need to be paid with the added cost of interest that will force the government to make some hard choices. Today, the federal budget deficit represents negative public saving which detracts from our national savings that weakens the US economy.
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