The Pros And Cons Of National Debt

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Debt appears everywhere in daily life. Most citizens have that experience; they spend more than they earn on their monthly paycheck and live in debt. Similar to such an instance, our economy experiences annual deficit spending. National debt is the total outstanding borrowings of a central government (WebFinance Inc), in other words, the accumulation of our annual deficits. In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.…show more content…
The Federal Reserve keeps control of the nations money supply.(Schiller) They provide currency to banks who loan out all of their money in order to generate interest. Banks loan out their money(excess reserves) in order to generate interest which earns them a profit. These banks would then be taxed by the government which finances the government. Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons.(Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough. Inflation would decrease the purchasing power of an individual's money, which would lead to more saving and less spending.(Fried) Less spending would mean less money being injected into the circular flow of our economy and would lead to economic crisis. However, many critics also use this to determine how national debt does not have a huge impact on the economy. A huge national debt has no effect on the money market. The fed has the ability to decrease interest rates, which could cause spending to increase.(Schiller) This ultimately increases the money supply and allows for more circulation in the economy, from which the economy can prosper. With a prospering market, taxes can be increased in order to stimulate the economy and prevent the money supply from surpassing equilibrium and reaching inflation. The revenue from these taxes can
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