📚 Learning Guide
Fiscal Policy and National Debt
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How does an increase in government spending as part of fiscal policy typically affect the national debt?

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Choose the Best Answer

A

It decreases national debt by reducing the need for borrowing

B

It has no impact on national debt

C

It increases national debt if financed through borrowing

D

It eliminates national debt entirely

Understanding the Answer

Let's break down why this is correct

Answer

When the government increases spending, it often borrows money to pay for those expenses, especially if it doesn't have enough revenue from taxes. This borrowing adds to the national debt because the government is taking on more loans that it needs to pay back in the future. For example, if a government decides to build new schools and does not raise taxes to fund it, it might issue bonds to raise the necessary funds. As more bonds are sold, the total national debt grows because the government is committed to repaying those amounts later. Therefore, while increased government spending can stimulate the economy, it usually leads to a higher national debt if not balanced by increased revenue.

Detailed Explanation

When the government spends more money, it often needs to borrow to pay for it. Other options are incorrect because Some might think that spending less means borrowing less; It's a common belief that spending doesn't change debt.

Key Concepts

Fiscal policy
National debt
Topic

Fiscal Policy and National Debt

Difficulty

medium level question

Cognitive Level

understand

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