ECON 214 D05 201320
Lisa A. Wilson
What is a budget deficit? How are budget deficits financed? Why do Keynesians believe
that budget deficits will increase aggregate demand?
A budget deficit is when government
spending is greater than government revenue over a specified amount of time; typically one year.
Budget deficits are financed by the government dispensing “interest-bearing bonds” that are
included in the national debt (Gwartney, Stroup, Sobel, Macpherson, 2013). Keynesians believe
that large budget deficits will increase aggregate demand by government spending, which
increases economic activity, which in turn decreases unemployment.
When output and employment slowed in early 2008, the Bush Administration and the
Democratic Congress passed a legislation sending households a check for $600 for each adult
(and $300 per child). These checks were financed by borrowing. Would a Keynesian favor this
action? Why or why not?
Yes, the Keynesians would favor this action.
The Keynesians believe
in the course of a recession, the government should run a larger deficit. The larger deficits should
“stimulate aggregate demand and ignite recovery” (Gwartney et al., 2013).
Keynesians believe in arming the consumer with more purchase power. This power is then
expected to increase the “consumption expenditures, which also raise aggregate” (Gwartney et
Unfortunately, the outcome did not align with their expectations, but the Keynesians
nonetheless would favor the actions of the Bush Administration.
Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2011).
Economics private and public
. (14 ed.). Mason, OH: South-Western, Cengage Learning.