If the government's tax revenues are less than its total spending (including debt-service payments),then we know
1)the government has an annual budget deficit;
2)the government has a primary budget deficit;
3)the stock of government debt is increasing.

Question

Quizplus · Accepted Answer

If the government's tax revenues are less than its total spending, including debt-service payments, it means that the government is running an annual budget deficit (choice 1). However, if we want to know whether the deficit is financed by new borrowing (meaning the stock of government debt is increasing), we need to look at the primary budget deficit (choice 2). The primary budget deficit shows the difference between government spending and tax revenues, excluding debt-service payments. If this is also negative, then it means that the government is not only spending more than it earns in taxes, but it is also borrowing to meet its spending needs, which increases the stock of government debt. Therefore, choices 1 and 2 together imply that the stock of government debt is increasing (choice 3), making E the correct answer.

If the Government's Tax Revenues Are Less Than Its Total