Federal Budget Stabilization Case Study

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Explain how an increase in federal budget deficit due to recession can stabilize the economy. A deficit means that the government spends more than it receives in tax revenues in a given year (O’Sullivan, Sheffrin, & Perez 2010, p. 374). The total deficit is spending, plus all the interest payments on top of the original debt, minus the total tax revenue (http://www.blurtit.com). There are three factors, known as automatic stabilizers, that affect and stabilize the economy, they are: 1) government purchases of goods and services, such as public safety, government transfer of payments, and unemployment insurance, 2) Medicaid or Medicare etc.,and 3) the collection of taxes. If the government cut taxes or increases transfer payments such as unemployment insurance and food stamps this helps to offset the decrease in household income. Additionally, when government cuts corporate taxes, it helps prevent businesses from cutting expenses as much as they would during a recession. Therefore, an increased federal budget deficit can help stabilize an economy for as households’ disposable income rises they will spend more. Fortunately, mechanisms such as automatic stabilizers are in place to neutralize the ups and downs of the economy without having to…show more content…
358). When the economy is in the long run, is reached equilibrium at the point where aggregate demand curve intersects the long run aggregate supply curve. Also there are higher overall prices and unemployment levels, should government policy over money wages not allow for falling wages, then an unemployment gap exists which will extend higher unemployment rates. (O’Sullivan, Sheffrin & Perez 2010 p

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