Economics of Social Issues Assignment Example | Topics and Well Written Essays - 500 words

Economics of Social Issues - Assignment Example The total budget deficit does not reflect the effect of all expenses and revenues of the federal government. Some items of expense and revenue are marked as off-budget while others are on-budget. The total budget deficit is the combined effect of the off-budget and on-budget categories. The items that are not included in the on-budget category include the social security payments and unemployment benefits. For most of the past decades the on-budget categories have resulted in a deficit which has been offset by a surplus in the off-budget categories to result in a lower total budget deficit, as in 2012. Cyclical deficits are less of a concern than structural deficits because they are of a temporary nature while structural deficits can be more persistent and even lead to inflation. Cyclical deficits arise as the economy goes through different phases of the business cycle (Arnold, 2010, p. 236). They occur especially during the recession phase when the government has to increase spending on social support. Structural deficits are more permanent and reflect fiscal mismanagement despite the business cycle. If the government cannot derive a reasonable return on them, it may have to print more currency or take on additional debt to pay off the deficit. Budget deficits tend to result in a crowding out of private firm and as a result private sector investment is reduced (Arnold, 2010, p. 241). The government borrows from the private sector to fund its deficit spending and to pay off creditors. As a result, the private sector is left with fewer funds to invest. As this also reduces the employability of private firms, the number of jobs in the economy also reduces. The graph shows the effect of budget deficit on the loanable funds market. The government issues bonds to cover its deficit spending which increases the demand for credit and the demand