Budget Deficit and the US Government Spends

Budget Deficit
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Budget Deficit
A budget deficit refers to the difference in the amount that the government spends and what it collects from taxes and revenues. Many governments tend to operate a budget deficit in order to raise or maintain their GDP. In this regard, the government may expose itself to certain long-term effects that are associated with budget deficits. One of the effects of budget deficit is that there will be increased borrowing from the private sector in order to ensure that the wheels of the economy keeps moving. In this case, the government will be paying its debts as they borrow others (Hunnicutt, 2010). As a result, there will be increased debt interest rates from the lenders which may lead to payment of higher amounts.
On the other hand, the government may resort to increase the amount of taxes that will be subject to the tax payers or cut on their expenditure to the public in order to mitigate the deficit. In this case, there will be lower incentives for the workers which might lead to collection of low taxes from the households. In addition, the government can decide to borrow money from the public by selling bonds and raising the interest rates in order to attract buyers (Hubbard & Brien, 2008). Therefore, when the interests are high, other institutions will also raise their interest rates which will harm the economy.
A budget deficit will force the government to continue to borrow more and therefore may lead to crowding out due to the decrease in size of the private sector. Therefore, the increased borrowing might lead to inflation in the country which will be characterized by increases in the prices of goods and services in the market. Inflation will be a burden to the households ...