5.2 Government Deficits and Debt

• Government deficits occur when government spending exceeds government revenue
• Match the type of deficit with its cause:

  Cyclical ↔️ Economic recession

  Structural ↔️ Government policies
• Ordering of cyclical deficits during an economic cycle:

  1️⃣ Government spending increases during recession

  2️⃣ Tax revenue decreases due to lower activity

  3️⃣ Cyclical deficit widens

  4️⃣ Government spending decreases during expansion

  5️⃣ Tax revenue increases due to higher activity

  6️⃣ Cyclical deficit shrinks
• Demographic changes, such as an aging population, can increase government deficits.

  True
• Government deficits occur when government spending exceeds government revenue
• Budget surpluses decrease government debt.


  True
• Structural deficits reflect long-term imbalances between government spending and revenue, regardless of the economic cycle.


  True
• Government debt is the total owed amount from past deficits.


  True
• Economic recessions increase government spending on unemployment benefits and stimulus packages
• What is another term for a government deficit?

  Budget deficit
• What are the two types of budget deficits?

  Cyclical and structural
• Structural deficits arise from permanent changes to government programs or tax policies.


  True
• What is government debt defined as?

  Accumulation of budget deficits
• What is the primary impact of economic recessions on government deficits?

  Deficit increases
• What is the crowding out effect caused by government borrowing?

  Reduces private investment
• Why are large and persistent government deficits considered problematic?

  They harm the economy
• What is the primary goal of effective debt management strategies?

  Debt sustainability
• A cyclical deficit is caused by fluctuations in the economic cycle
• Government debt is the total accumulation of budget deficits minus budget surpluses
• Government debt is the total accumulation of budget deficits minus budget surpluses
• Match the factor affecting deficits with its impact:

  Economic Conditions ↔️ Worsens during recessions

  Global Events ↔️ Necessitates increased spending
• If the government spends \$2 trillion and collects \$1.8 trillion in taxes, it has a deficit of \$200 billion.


  True
• Cyclical deficits are caused by fluctuations in the economic cycle
• Match the type of deficit with its effect on the economy:

  Cyclical deficit ↔️ Widens during recession

  Structural deficit ↔️ Unaffected by economic cycle
• Government debt is the total owed amount from past deficits
• Order the factors affecting government deficits and debt from most direct to least direct impact:

  1️⃣ Government Policies

  2️⃣ Economic Conditions

  3️⃣ Demographic Changes

  4️⃣ Global Events
• High government debt relative to GDP can make debt unsustainable
• Match the debt management strategy with its description:

  Debt Restructuring ↔️ Renegotiating debt terms

  Debt Refinancing ↔️ Replacing debt at lower rates

  Debt Repayment ↔️ Using surpluses to pay debt
• An aging population can increase government deficits due to higher healthcare costs.

  True
• Large government deficits can lead to inflationary pressures.


  True
• Austerity measures, such as reducing social programs, can lower government deficits.


  True