Question

Under what circumstances would deficit spending to increase aggressive demand have a negative effect? Please help.

Answer 1

Answer:

Deficit spending to increase aggregate demand would have a negative effect when aggregate demand is already high, and the economy is growing.

This is because deficit spending in such circumstances would have the effect of overheating the economy, likely creating economic bubbles in several markets that would burst out eventually, creating worst conditions for the downward stage of the economic cycle.

This is why Keynes recommended Deficit spending only when the economy is in a downward cycle, something that is also known as countercyclical fiscal policy.