If the government runs a deficit, the total amount of government debt is Question content area bottom
A. zero. B. increasing. C. constant. D. decreasing.
The correct answer and explanation is:
The correct answer is B. increasing.
When a government runs a deficit, it means that its expenditures exceed its revenues during a given period. The deficit represents the shortfall, which the government needs to cover by borrowing money. This borrowing typically takes the form of issuing government bonds or other forms of debt. As the government borrows money to finance the deficit, the total amount of government debt increases.
Government debt is the accumulation of past deficits. Each time the government borrows to cover a deficit, it adds to the total outstanding debt. Over time, as deficits continue to occur, the national debt increases, unless the government runs surpluses in future years to offset previous deficits.
If the government continues to run deficits year after year without reducing expenditures or increasing revenues (through taxes or other means), the total debt will continue to rise. This growing debt can have several consequences, including higher interest payments, potential crowding out of private investment, and challenges in managing fiscal policy.
It is important to note that a government’s ability to manage deficits and debt depends on various factors, including economic growth, the interest rate on its debt, and investor confidence. If the economy grows at a faster rate than the debt accumulates, the government may still manage its debt effectively, even with deficits. However, long-term and sustained deficits without proper debt management can lead to financial instability.
In summary, when the government runs a deficit, the total amount of government debt increases, as the deficit is typically financed through borrowing.