Rising Budget Deficits and National Debt- Pros and Cons and Evaluation

Question 1

What is a budget deficit?

Answer 1

When government spending exceeds revenue in a given year.

Question 2

What is the national debt?

Answer 2

The total stock of government borrowing accumulated over time.

Question 3

What is a structural budget deficit?

Answer 3

A budget deficit that exists even when the economy is at full employment.

Question 4

What is a cyclical budget deficit?

Answer 4

A deficit caused by a recession and the economic cycle.

Question 5

Give two pros of running a budget deficit or increasing national debt.

Answer 5

Can boost economic growth and reduce unemployment

Allows spending on infrastructure, healthcare, and education

Question 6

Give two more pros of budget deficits.

Answer 6

3. Redistributes income through welfare
4. Can fund tax cuts, improving incentives and demand

Question 7

Give three cons of budget deficits and national debt.

Answer 7

Deterioration of government finances

Can lead to higher inflation

May worsen the current account balance

Question 8

What is ‘crowding out’?

Answer 8

When government borrowing raises interest rates, reducing private sector investment.

Question 9

What is ‘crowding in’?

Answer 9

When government spending stimulates private investment by boosting economic activity.

Question 10

What factors are important in evaluating deficits and debt?

Answer 10

Health of government finances

Short-run vs long-run effects

Stage of economic cycle

Confidence levels

Specific policies used

Role of automatic stabilisers