A government runs a deficit year after year. Arrange the following in the order in which they follow:
(A) Interest payments on the debt grow larger.
(B) The government borrows to finance its deficit.
(C) The stock of government debt builds up.
(D) The interest payments themselves add to the debt.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B), (C), (A), (D)
A deficit is a flow and debt is a stock. Each year’s borrowing adds to the stock, and the size of the stock decides the interest bill.
(B) The government borrows to finance its deficit. — Deficits can be met by taxation, borrowing or printing money; governments have mostly relied on borrowing.
(C) The stock of government debt builds up. — Each year’s deficit is a flow that adds to the stock of debt.
(A) Interest payments on the debt grow larger. — A bigger stock of debt means the government has to pay more and more by way of interest.
(D) The interest payments themselves add to the debt. — Interest is part of expenditure, so a larger interest bill widens the deficit and the debt grows further.
NCERT (2026-27): “Debt Budgetary deficits must be financed by either taxation, borrowing or printing money. Governments have mostly relied on borrowing, giving rise to what is called government debt. The concepts of deficits and debt are closely related. Deficits can be thought of as a flow which add to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more by way of interest. These interest payments themselves contribute to the debt.” |