Macroeconomics: Budget deficit and debt relation; Fiscal policy

Macroeconomics
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Fiscal policy
Fiscal policy connotes that the government influences economic activities through revenue and expenditure measures that seek to attain full employment (Hansen, 2003). Government taxation is the most widely used instrument that affects economic activities, overall the budgetary allocations take into account both the revenue and expenditures factors, influencing the economy. With the recent news about fiscal cliff in the United Sates of America, policy makers, politicians and citizens are more concerned about budgetary deficits more than ever before. In essence, both fiscal and monetary policies are employed together in achieving set goals. The changes on the level of government taxation affect the national output by acting as an incentive or disincentive for investors.
Expansionary fiscal policies typically relate to budget deficits like the one being experienced in America, as the levels of spending are higher than revenue collection. However, economists view the reduction of deficits as constituting contractionary policies, similar to budget surpluses. Thus, in most cases it is the changes in the levels of federal budget deficits that determine whether the policies adopted are expansionary or contractionary. In comparing the figures of many years it is essential to adjust for inflation and business cycle fluctuations, to standardize the comparison. The year 2009 recorded the highest levels of deficit at $ 1,413 billion following, and there have been marginal reductions from this amount (Chantrill, 2013).
The use of budgetary deficits affects the economy of the US by having a direct impact ob the aggregate demand. The increase in the levels of deficits necessitated the issuing of more bonds to finance deficit. Consequently, opponents of deficit financing say that the approach reduces competitiveness of the US economy, as the federal government crowds out investment from private investment. This mechanism occurs where there is increase in interest rates, which eventually reduces th...