How does a government budget deficit affect the economy?


Quick Answer

A government budget deficit can affect the economy in many ways, most notably it may force the government to print more money to finance the deficit, decreasing the value of the nation's currency. However, running deficits can be beneficial in the short term, as it allows the government to increase GDP and continue to provide the services that allowed it to secure loans from other governments initially, according to About.com.

Continue Reading

Full Answer

Governments are similar to businesses and people in that they are susceptible to running deficits. Key differences exist between them, however, as governments are able to print more money to pay off deficits, whereas private companies and individuals are not. The only real concern for stable nations running deficits is if their creditors lose confidence in their ability to repay. When a creditor loses confidence in the debtor's ability to repay their loan, oftentimes they sell all their holdings of the debtor nation's currency. The increased supply and lowered demand reduces the overall value of the currency, making imports to the country more expensive for citizens. To prevent this negative affect on the economy, the debtor nation may instead use its own foreign currency reserves to buy back its own currency.

Learn more about Economics

Related Questions