Effects Of A Budget Deficit

Question 1

Increased borrowing

Answer 1

Gov has to borrow from private sector- asking Bank of England to sell bonds and gilts

Question 2

Higher debt interest payments

Answer 2

Selling bonds will increase the national debt

Question 3

Increased AD

Answer 3

Lower taxes and increased GS = higher GDP and inflation

Question 4

Higher taxes and lower spending

Answer 4

Governments may have to increase taxes or cut spending to reduce the deficit

Question 5

Increased interest rates

Answer 5

If the gov sells more bonds this increases interest rates, to attract investors to buy the debt

Question 6

Crowding out

Answer 6

Increased gov borrowing decreases size of private sector

Question 7

Inflation

Answer 7

Extreme circumstances- gov increases money supply to pay debt

Question 8

Effects of a budget deficit

Answer 8

Increased borrowing
Higher debt interest payments
Increase AD
Higher taxes and lower spending
Increased interest rates
Crowding out
Inflation