The government budget constraint tells us that the budget deficit is equal to:

Question

Quizplus · Accepted Answer

The government budget constraint equation is:
Government Spending = Taxes + Borrowing
This can be rearranged as follows:
Borrowing = Government Spending - Taxes
From this equation, we can see that the budget deficit (which represents borrowing) is equal to the amount by which government spending exceeds taxes. However, this does not account for interest payments on the debt. In order to include interest payments, we need to distinguish between the primary deficit (the difference between government spending and taxes, excluding interest payments) and the overall budget deficit. The overall budget deficit is equal to the primary deficit plus interest payments on the debt. Therefore, the correct answer is A) the primary deficit plus interest on the debt.

The Government Budget Constraint Tells Us That the Budget Deficit