Week 6 Assignment Deficit Balance International Economics

International Economics
Student’s Name
Institution
International Economics
Deficit Balance
With a deficit balance of $16 trillion in 2013, the US economy was bound to be affected if it grew further. The high deficit balance raises concerns for the economy in the long run. In the short run, however, deficit spending drives the economy. When the deficit spending is used on healthcare, infrastructure, and government subsidies, the economy is impacted positively. On the other hand, a deficit balance, in the long run, can harm the economy in the case it grows too big. As informed by Boccia (2013), the high deficit balance puts the country at risk of prolonged and significant reduction in economic growth. The high deficit balance means there is the risk of interest rates being driven up, the private investment being crowded out, and inflation.
With high deficit balance, there is the risk that creditors may demand higher interest rate in the case the country becomes unable to serve its debts. In the case the debt is rising faster than the economic growth rate, the government is forced to keep borrowing in order to service its existing debt. In this case, creditors may demand higher rates in order to compensate for the risk that comes with the inability of the country to service its debts. With higher interest rates, the government is forced to tax its citizen more which eventually reduces economic activity. In addition, when the government bond interest rates are high, it translates to higher rates in other domestic investments such as business loans, consumer loans, and mortgages (Boccia, 2013). It thus becomes expensive for citizens to borrow money and the investment in the country is significantly reduced. It is thus evident that high interest rates that come with high deficit balance is detrimental to the lives of ordinary citizens and translates to low investment. As informed by Krugman, Obstfeld, & Melitz (2013), the government is concerned about the interest rate since it affects investment. The high deficit balance is thus a concern for the economy.
Private investment can also be crowded out as a result of the high deficit balance. The high deficit balance is achieved when the government borrows money mainly from the public and it thus reduces the funds that are available for private investment. With a reduced private investment, the economy experiences slower economic growth (Boccia, 2013). Lower economic growth translates to fewer opportunities and reduced number of jobs. In addition, with low investment, opportunities for technological advancement are minimized and the country can be at a disadvantage against others. The high deficit balance can also result in inflation. The government has the option of increasing the money supply in order to devalue the deficit. Such action can affect individuals, particularly those on fixed incomes. The price of basic goods and services such as medical care, food, and clothing will increase due to inflation (Boccia, 2013). In addition, such action can dethrone the US dollar as the primary reserve currency for the world.
In the case there is surplus, the government need not be equally concerned unlike when there is deficit balance. With a surplus, the spending of t...