Traditionalists argue that a reduction in the budget deficit will significantly help the economy in

Traditionalists argue that a reduction in the budget deficit will significantly help the economy in

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Traditionalists argue that a reduction in the budget deficit will significantly help the economy in the long run. This theory is based on the following logic. When the government runs a budget deficit, it is spending more than it is taking in. In this way, national savings decreases. When national savings decreases, investment--the primary store of national savings--also decreases. Lower investment leads to lower long-term economic growth. Similarly, lower investment is accompanied by higher domestic interest rates, which decreases net exports. Based on this logic, a budget deficit is a drain on the long-term economy. But the Ricardian view of the budget deficit takes a much less negative position on this issue. Supporters of this view believe that a budget deficit represents trading taxes in the future for taxes today. That is, if the government spends more than it taxes today, the future for taxes today....
View Full Document

This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

Ask a homework question - tutors are online