discretionary fiscal policy is the deliberate use of changes in government spend

Question

discretionary fiscal policy is the deliberate use of changes in government spending and/or taxes to alter aggregate demand and stabilize the economy. You will also recall that the U.S. economy undergoes alternating periods of economic growth and contraction (i.e., the business cycle). According to Keynesian economics, the government should increase spending and/or reduce taxes (e.g., run a budget deficit) to combat a recession and should decrease spending and/or raise taxes to combat inflationary pressures during an expansion. Thus, using a Keynesian economics approach to fiscal policy we would expect (and accept) budget deficits to occur whenever the economy is in recession and budget surpluses whenever the economy is in recovery. Use your knowledge of the Keynesian economics approach to fiscal policy, the business cycle, and budget surpluses and deficits to answer the following question: What impact would requiring the U.S. Government have a balanced budget each year (e.g., balanced budget amendment to the constitution) have on the national economy? Write a short paragraph explaining how you think requiring a balanced budget would impact the national economy. Your explanation should be specific and reflect an understanding of the relationship between the use of fiscal policy and GDP, unemployment, and price levels in the economy and how GDP, unemployment and price levels would be impacted if a balanced budget was required each and every year.

Explanation / Answer

Maintaining a balanced budget every year can lead to seious problem for the economy. This can put economy into serious recession when the economy is weak. This means that when the economy is weak, government will reduce spending and increase taxes which will further worsen the economy. This amendment will pose a major hurdle for the economy.

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