Question

What part does interest play in deficit spending? A.) Governments must pay interest on money they borrow when they take on debt. B.) Citizens must pay interest when their governments borrow money. C.) Governments may charge foreign countries interest when they borrow money. D.) Interest is not a factor when a government's budget is in deficit.

Answer 1

The correct answer is A.

When a goverment has a budget deficit, it means that its total expenses have exceded its total revenues.

Therefore, in order to finance such difference, borrowed money is used. Such money is obtained in the financial markets in exchange for a price, called interest, which is applied as a percentage of total amount borrowed. Therefore, the bigger the deficit, the larger the more needs to be borrowed and the higher the total amount that needs to be paid in terms of interests.