Economics

Deficit budget

Q: If the government spends by increasing the deficit, which two effects will macroeconomics examine?

Aggregate demand and government borrowing Deficit-financed government expenditure can directly increase aggregate demand and may raise output and employment when spare capacity exists. Since expenditure exceeds current receipts, the government must borrow or use other financing sources, increasing public borrowing and possibly affecting interest rates and future debt sustainability.

In Class 12 Economics, this topic explains how a deficit budget arises when the government’s total expenditure exceeds its receipts. As part of Government Budget and the Economy, students explore revenue, fiscal and primary deficits, and learn how governments finance shortfalls through borrowing or other measures. They also examine the possible effects on public debt, inflation, economic growth and fiscal policy, developing a balanced understanding of why deficit financing may be used and what trade-offs it creates.

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01If the government spends by increasing the deficit, which two effects will macroeconomics examine?

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Answer and explanation

Correct answer: A. Aggregate demand and government borrowing

Deficit-financed government expenditure can directly increase aggregate demand and may raise output and employment when spare capacity exists. Since expenditure exceeds current receipts, the government must borrow or use other financing sources, increasing public borrowing and possibly affecting interest rates and future debt sustainability.

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Deficit budget

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