The effects described so far begin as soon as the government begins to run a budget deficit. Suppose, as is often the case, that the government runs deficits for a sustained period, building up a stock of debt. In this case, the accumulated effects of the deficits alter the economy’s output and wealth.
In the long run, an economy’s output is determined by its produc- tive capacity, which, in turn, is partly determined by its stock of capital. When deficits reduce investment, the capital stock grows more slowly than it otherwise would. Over a year or two, this