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Briefly explain how a budget deficit arises and what circumstances a government may choose to run...

Briefly explain how a budget deficit arises and what circumstances a government may choose to run a deficit.
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Answer #1

A budget deficit arises when government expenditures exceed government revenues.

In deflationary or recessionary situations, a government may choose to run a deficit in order to stimulate the economy and making it recover the recession. In most of the economies in which government is running budget deficit for many years, government does not have any option to reduce its budget deficit as it can't cut its expenditure (e.g. expenditure on defence, interest payment on national debt, compensation to government employees, etc.) while at the same time, its also not able to generate revenue to cover those expenditures.

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