1. Explain why reducing the budget deficit can cause short-term pain in the form of lower employment, higher unemployment, and a recession.

Question

This is an assignment for my macroeconomics class.

Answer 1

To reduce a budget deficit, you have to cut spending to match income.  That may mean downsizing personnel to cut costs.  As people lose their jobs, you have both lower employment and higher unemployment.  These unemployed people then cannot stimulate the economy by spending, particularly in the housing and car markets, which tend to be the largest stimulants to the overall economy.  As these industries lag, the country can fall into recession.

 

Hope this helps, Lucas!