Question

Your study partner argues that the distinction between the government’s budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you have large budget deficits, you must have a large debt. In what ways is your study partner correct and in what ways is he incorrect?

Answer 1

Answer:

Your study partner is correct that the distinction between government’s budget deficit and debt is similar to the distinction between consumer savings and wealth.

Savings and deficits are actions that take place over time, they dont happen overnight . When any government is spending more than it receives in tax revenue in a particular time period, this governmemt will be running a budget deficit. On the other hand, when consumers spend less than their disposable income in a particular time period, they are saving.

However, both debt and wealth are measured at one point in time. When the government runs a budget deficit, the deficit is almost always financed by borrowing, which adds to its debt. This is also Similar to consumers who accumulate wealth by saving.

We can also say that your study partner is wrong in that the government can run a large budget deficit and have a small debt if it hasn’t run large deficits in the past.

Explanation:

See answer for the detailed explaination