Answer to Question #238506 in Macroeconomics for Comfort

Question

b. If the government has a persistent budget deficit of say $30bn (assume this is equivalent
to 5% of total output of the economy, that is of GDP) , then how can it 'finance the
deficit' and what might be the consequences for the economy in general?

Answer 1

The government may choose on reducing the tax rate. This may encourage spendings within customers. When the tax rate goes down, the price of the product will also reduce, which will increase the sales within the market. This will generate more revenue to the government, hence increasing the output and GDP.