Question 51

Federal budget deficit = govt borrows

A federal budget deficit occurs when the government spends more money than it collects in taxes, necessitating borrowing to cover the shortfall.

A) govt spends less than taxes

This option is incorrect because if the government spends less than it collects in taxes, it results in a budget surplus, not a deficit. A surplus means that the government has excess funds rather than borrowing.

B) govt borrows

This option is correct as it accurately describes the situation during a federal budget deficit. When expenditures exceed revenues, the government must borrow funds to finance its operations, which is a defining characteristic of a budget deficit.

C) exports > imports

This option is not relevant to the concept of a federal budget deficit. While a trade surplus (exports greater than imports) can affect the overall economy, it does not directly indicate whether the government is borrowing or running a deficit.

D) interest costs fall

This option is incorrect because falling interest costs do not directly relate to the occurrence of a budget deficit. In fact, lower interest rates may reduce borrowing costs, but they do not eliminate the necessity to borrow when a deficit exists.

Conclusion

The correct answer, "govt borrows," clearly explains the action taken by the government to finance a budget deficit. All other options fail to accurately represent the relationship between government spending and its need to borrow, either mischaracterizing the situation or addressing unrelated economic concepts.