Reference no: EM132288609

In the case of a recession, an appropriate expansionary fiscal policy is to increase government expenditure and/or decrease tax rates. The effects of these policies depend on the size of the multiplier. Expanding government expenditure and reducing taxes can cause the government budget deficit (government expenditure is larger than its revenue) to get larger. Budget deficits are usually cover from borrowing from public (most of the time) which causes:

1) Interest rates to rise as money demand increases,

2) Decrease private investment (commonly known as crowding out),

3) Decrease public savings due to consumer's lending money to government,

4) Decrease growth (reduced investment causes productive capacity to grow slower)

Should we force the government to balance the budget? What will be the consequences of government having a surplus? What are the laws Congress passed to balance or not to balance the budget?