Answer to Question #102192 in Macroeconomics for sujan

Question

Adam Smith remarked in “The Wealth of Nations’ concerning the balancing of the government budget. “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom” What problems might there be if the government decided to follow a balanced budget approach to its spending.

Answer 1

The balanced budget approach can be realized by the government through cutting spendings in the situation when its expenditures overweight revenues (generally during economic recession). If the government decides to follow a balanced budget approach during economic contraction, demand will fall, which will lead to decline of gross domestic product (GDP) and in this case authorities couldn't do anything to stop this process. Moreover, since unemployment rises during a recession, the government's income tax revenue will fall and the crysis will become more deep.