Question

Assignment Instructions

During the Great Recession, like any other economic downturns, as unemployment rises, aggregate income declines causing a major decline in tax collections. On the other hand, with the rise in unemployment, spending on safety net programs rise. So, to stabilize the national economy, government appears to have only two options (neither good) either to put in place severe austerity measures (cut spending) or increase borrowing. Of course, it is very difficult to defend cuts in the federal government programs and especially the programs geared to sustain the minimum of the standard of living for the “poor.” But increase in borrowing has major adverse impacts on the national economy.

Write an essay analyzing

· Different theoretical views on national debt,

· Long-run costs of high national debt,

· Costs of eliminating the budget deficit solely through (1) personal tax increases, and/or (2) through spending cut by decreasing in transfer payments (i.e., Social Security, Medicare and Medicaid) and in discretionary spending (such as defense and education budgets).

Answer 1

Increased national borrowing always lead to pile up of national debt which becomes an aggravated problem as in future government raises taxes exponentially to recover tje debt and cut down on excess liability. Increasing borrowing also leads to fiscal deficit which is big problem  

Long run costs of high national debt leads to withdrawal of money from private sector investments and reduced output and hence lower incomes which causes lower discretionary spending  

Cost of elimination of budget deficit are high inflation, helathcare damages, loss of basic amenities which all inpact quality of Life Index and standard of living and also reduce disposable incomes, through increasing taxes or austerity measures and decrease of government spending