Question

The disadvantages for the government when it relies on external sources to fund a budget deficit are:

• A. Increase in the expenditure
• B. Chances of further deficit
• C. Decrease in the revenue
• D. No downside

Answer 1

Answer: (A), (B)

The correct options are
A

Increase in the expenditure

B

Chances of further deficit

When the government relies on external sources and borrows to fund a deficit, it can lead to a debt loop, as it consists of interest payments on these loans, and the previous loans. This increases the expenditures and leads to a greater deficit.