MODULE 30: Long-Run Implications of Fiscal Policy: Deficits and the Public Debt

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MODULE 30

Long-Run Implications of Fiscal Policy: Deficits and the Public Debt

Marmaduke St. John/Alamy

30Long-Run Implications of Fiscal Policy: Deficits and the Public Debt

In this Module, you will learn to:

Explain why governments calculate the cyclically adjusted budget balance
Identify problems posed by a large public debt
Discuss why implicit liabilities of the government are also a cause for concern

In Module 20 we discussed how discretionary fiscal policy can be used to stabilize the economy in the short run. During a recession, an expansionary fiscal policy—raising government spending, lowering taxes, or both—can be used to shift the aggregate demand curve to the right. And when there are inflationary pressures in the economy, a contractionary fiscal policy—lowering government spending, raising taxes, or both—can be used to shift the aggregate demand curve to the left. But how do these policies affect the economy over a longer period of time? In this module we will look at some of the long-term effects of fiscal policy, including budget balance, debt, and liabilities.