ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A budget deficit implies that the national debt is increasing. But since the GDP is also rising, the ratio of the national debt to GDP may or may not be increasing. That depends on whether the growth rate of the national debt is more than or less than the growth rate of GDP.

Detailed explanation-2: -Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt.

Detailed explanation-3: -Unlike the deficit, which drives the amount of money the government borrows in any single year, the debt is the cumulative amount of money the government has borrowed throughout our nation’s history. When the government runs a deficit, the debt increases; when the government runs a surplus, the debt shrinks.

Detailed explanation-4: -Crowding-Out: High deficit leads to further borrowings by the government. This reduces the availability of funds in the money market for private firms. A lower supply of money leads to a higher interest rate.

Detailed explanation-5: -The term government deficit implies increase in the debt of the government. In other words, if the government continues to borrow to finance deficit, it leads to additional debt.