Problem_Set_2_Wilson_Lisa

Econ 214 d05 201320 lisa a wilson liberty university

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ECON 214 D05 201320 Lisa A. Wilson Liberty University 3. 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. 4. 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). Lastly, the 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 al., 2013). Unfortunately, the outcome did not align with their expectations, but the Keynesians nonetheless would favor the actions of the Bush Administration. Works Cited: Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2011). Economics private and public choice . (14 ed.). Mason, OH: South-Western, Cengage Learning.
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