Question

According to monetarists, how should budget deficits be handled?

A. Deficits are acceptable because they are offset by growth in GDP.
B. Deficits should never exceed 20% of the entire fiscal year budget.
C. The government should borrow twice as much as needed to cover a deficit to stimulate demand.
D. The government should not run a budget deficit; the budget should always be balanced.

Answer 1

Monetarists believe the government should not run a budget deficit and that budgets should always be balanced, though acknowledging that they may not need to be strictly balanced every calendar year.

Step-by-step explanation:

According to monetarists, the way budget deficits should be handled aligns with the idea that the government should not run a budget deficit; the budget should always be balanced. Monetarists argue that in the long run, budget deficits can lead to inflation, reduced national savings, and could impede economic growth, potentially leading to financial crises.

They caution against running persistent deficits, despite acknowledging that short-run budget deficits may have the effect of shifting aggregate demand to the right. Additionally, monetarists recognize that balanced budgets are not strictly required in every calendar year, as long as deficits are not excessively large and do not outpace GDP growth in the long term.