Question

Sketch a diagram of how sustained budget deficits cause low economic growth.

Short answer

Sustained budget deficits:

The Risk of Financial and Fiscal Disarray in the Long Run in the United States The federal budget of the United States is on an unsustainable course. Federal government deficits are likely to amount around $5 trillion over the next decade unless significant policy reforms are made.

Step-by-step solution

Definition

Sustained budget deficits:

The Risk of Financial and Fiscal Disarray in the Long Run in the United States The federal budget of the United States is on an unsustainable course. Federal government deficits are likely to amount around $5 trillion over the next decade unless significant policy reforms are made.

Step 2; Explanation

A budget deficit occurs when the government spends more than it receives. As a result, national savings fall. Investment—the major store of national savings—decreases when national savings decline. Long-term economic growth is hampered by a lack of investment. Budget deficits, according to conventional economic theory, increase total expenditure (aggregate demand) and thus short-term economic growth. If increased government spending causes a budget deficit, the new government expenditure immediately expands aggregate spending.