Governments typically operate on a budget. When the expenditures of a government are greater than its revenues, it creates a deficit. Some economists recommend this type of deficit spending in order to prevent or alleviate a recession. There is, however, a danger of creating inflation.
A government deficit impacts the economy through the loanable funds market. When there isn't enough money to cover the budget, the government must borrow. This increases the sum demand for loanable funds and thus pushes up interest rates.
