If the federal government is running a budget deficit,
A) the national debt will decline.
B) it will have to either raise taxes or reduce expenditures next year.
C) the U.S. Treasury will finance the deficit by issuing additional bonds.
D) the supply of money will increase and the general level of prices will rise.

Question

Quizplus · Accepted Answer

When the federal government runs a budget deficit, it means that its expenditures exceed its revenue. In order to finance the deficit, the U.S. Treasury will issue additional bonds, which are essentially IOUs that the government promises to repay with interest in the future. This increases the national debt, which is the total amount of money the government owes to its creditors. A budget deficit does not automatically lead to a reduction in the national debt, nor does it necessarily require the government to raise taxes or reduce expenditures immediately. However, over time, the government may need to address the deficit by taking these steps or by pursuing other fiscal policies. An increase in the supply of money and a rise in the general level of prices (inflation) are not inevitable consequences of a budget deficit, but they could occur if the government prints more money to finance its deficit or if investors lose faith in the government's ability to repay its debts, leading to a decline in the value of the currency.

If the Federal Government Is Running a Budget Deficit