Running a federal budget deficit would tend to increase real output in the short run, but running persistent large federal budget deficits could result in reducing real output in the long run, other things being equal.

Question

Quizplus · Accepted Answer

Running a federal budget deficit can stimulate economic activity in the short run by increasing government spending, which can lead to increased employment, production, and consumption. However, if the deficits persist and lead to a buildup of debt, they could cause concerns among investors about the government's ability to repay, leading to higher interest rates and reduced business confidence. This could eventually result in reduced investment, lower economic growth, and ultimately a decrease in real output in the long run.

Running a Federal Budget Deficit Would Tend to Increase Real