📚 Learning Guide
Government Budget Deficits
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How does an economic recession typically influence government borrowing and budget deficits?

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Choose the Best Answer

A

Governments are likely to reduce borrowing during a recession.

B

Governments usually increase borrowing to stimulate the economy during a recession.

C

There is no impact on government borrowing during a recession.

D

Governments generate surpluses during economic recessions.

Understanding the Answer

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Answer

During an economic recession, the government often sees a decrease in tax revenues because people and businesses earn less money. This drop in income makes it harder for the government to balance its budget, leading to budget deficits, which means the government is spending more than it earns. To cover these gaps, the government may borrow money by issuing bonds or taking loans, which increases its overall debt. For example, if a country faces high unemployment and lower business profits, it might need to borrow more to fund social programs and stimulate the economy. Therefore, during a recession, government borrowing usually rises, leading to larger budget deficits as the government tries to support its citizens and promote recovery.

Detailed Explanation

During a recession, people spend less money. Other options are incorrect because Some might think the government cuts borrowing during tough times; It's a common belief that borrowing stays the same.

Key Concepts

economic recession
government borrowing.
Topic

Government Budget Deficits

Difficulty

medium level question

Cognitive Level

understand

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