Please answer the following questions related to the nationa

Please answer the following questions related to the national budget deficit in the United States. Which of the reasons given below is often cited as a benefit of running a budget deficit? Why does a deficit automatically emerge during an economic recession? Consumers reduce their spending during recessions. During a recession, tax revenues increase while transfer payments decrease. Recessions force producers to increase prices, causing a budget deficit. During a recession, tax revenues decrease while transfer payments increase.

Solution

The primary benefit of running a budget defecit is because working under deficit conditions helps to smooth out tax rates over time. Taxation in the economy has distortionary effects because people\'s willingness to work depends only on the real income of the person, i.e., income after tax deduction. So the government wants to spread the distortionary tax effect over many years which is known as tax smoothning.

Defecit automatically emerges during an recession because during a recession the government spends more to increase the GDP of the country and try to pull the economy out of recession thereby increasing transfer payments whereas at the same time owing to increase in unemployment during recession the tax collection of the country decreases.