Question

In which of the following cases does the size of the government’s debt and deficit indicate potential problems for the economy? Explain your answer.

a) The government’s debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation.

b) The government’s debt is relatively high due to a recently ended deficit-financed war, but the government is now running only a small budget deficit.

c) The government’s debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt.

Answer 1

C. The government debt is relatively low, but the government is running q budget deficit to finance the interest payment on loans.

This is the worst condition because incurring a deficit to finance loans is the biggest vicious cycle of debt. Where the Government will now take loans to finance interest payments which will later demand more loans to payout the principle amount. These are liabilities which create profits in the long run till then prove very harmful to an economy's growth.