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Argument: National deficits are bad when an economy is fully employed

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  • "[National deficits are] Bad: When the economy is close to full employment (potential GDP), higher budget deficits will not increase output by much and will actually decrease investment demand. The Id effect occurs because the deficit uses up the private sector's supply savings, driving up interest rates and leaving fewer funds for investment. This is called "crowding out." Here budget deficits drive up inflation and lower long run growth of GDP."

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