Question

Which of the following might be a good reason for running a budget deficit?

	a.	It allows for the expansion of entitlement programs to cover more people, thus reducing their financial burdens.
	b.	It is better than increasing taxes, because budget deficits do not have to be repaid.
	c.	It puts the repayment burden on future taxpayers, who are better able to repay the accumulated debt.
	d.	There is never a good reason for running a budget deficit.
	e.	A budget deficit allows for consumption to be more evenly distributed over time, which can be helpful during times of recession.

Answer 1

A good reason for running a budget deficit is:

A budget deficit allows for consumption to be more evenly distributed over time, which can be helpful during times of recession. Budget deficit occurs when government expenditure is more than government revenue. During periods of recession, the private sector saves more and spends less. Because of this a lot of resources remain unused. These unused resources can be utilized by way of government borrowing. The government expenditure will enable more growth and this will lead to greater tax revenue. As a result of this the budget deficit will decrease. Also an increase in government spending leads to an increase in the aggregate demand. Increase in aggregate demand leads to a rise in output and fall in the unemployment rate.

Therefore the correct option is e.