Suppose country A's government budget is in balance. Suppose now the government increases deficit spending. Would it cause household savings to decrease? Explain.

If country A has an increase in government spending that causes a deficit, then the government of country A is responsible for paying the deficit. Payment for the deficit does not get automatically drawn from private savings accounts unless the government established a tax to do just that, but such a tax would likely never work because it would be extremely unpopular. Instead country A may develop a variety of taxes to pay back their debt, but households would still have discretion over how much they spend on goods and services and how much they save.

Some nations will simply print more money in order to pay back a government deficit, and this will usually cause a lot of inflation. In such circumstances, households that have their savings in something like gold may not be impacted by the government money printing to pay back public debt. Other households that have their savings in the currency of the nation may find the purchasing power of their savings to have diminished from the large quantity of money suddenly put into circulation by the government. If people fail to retain the value of their savings (the purchasing power) because of high inflation, then the government often will collapse. In conclusion, governments know that printing more money to pay for public debt can result in a government collapse, so they usually try to avoid mass production of currency for paying public debts.

If the government deficit was from stimulus spending that was focused on stimulating supply and demand at the same time in a free market, then the government may not need to raise taxes to pay back the public debt. As an example, if the more economic activity occurred as a result of the stimulus and tax rates remained the same, then the increase in economic activity could render more tax revenue to pay for the deficit. In such a case, households may still have the same savings levels or greater savings levels if the stimulus spending simply resulted in people going back to work after an economic downturn filled with unemployment. In short, an increase in deficit spending for a country need not have a negative impact on household savings.