Consider the following statements:
(A) If government deficits succeed in raising production, there will be more income and, therefore, more saving.
(B) If government deficits raise production and saving, both the government and industry can borrow more.
(C) The growth in debt has to be judged by the growth of the economy as a whole.
(D) Crowding out happens because government bonds increase the savings available to private borrowers.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (C) only
Savings are not fixed when deficits raise output. More output brings more income and more saving.
(A) If government deficits succeed in raising production, there will be more income and, therefore, more saving. — Correct. Saving grows with income.
(B) If government deficits raise production and saving, both the government and industry can borrow more. — Correct. There is more saving to lend.
(C) The growth in debt has to be judged by the growth of the economy as a whole. — Correct. Debt can be paid off by the growth in output.
(D) Crowding out happens because government bonds increase the savings available to private borrowers. — Incorrect. Government bonds reduce the funds left for private borrowers, and so crowd them out.
NCERT (2026-27): “Other Perspectives on Deficits and Debt: … It has been argued that there is a decrease in investment due to a reduction in the amount of savings available to the private sector. This is because if the government decides to borrow from private citizens by issuing bonds to finance its deficits, these bonds will compete with corporate bonds and other financial instruments for the available supply of funds. If some private savers decide to buy bonds, the funds remaining to be invested in private hands will be smaller. Thus, some private borrowers will get ‘crowded out’ of the financial markets as the government claims an increasing share of the economy’s total savings. However, one must note that the economy’s flow of savings is not really fixed unless we assume that income cannot be augmented. If government deficits succeed in their goal of raising production, there will be more income and, therefore, more saving. In this case, both government and industry can borrow more. Also, if the government invests in infrastructure, future generations may be better off, provided the return on such investments is greater than the rate of interest. The actual debt could be paid off by the growth in output. The debt should not then be considered burdensome. The growth in debt will have to be judged by the growth of the economy as a whole.” |