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Deficits flow, debts pile up

Civics & Economics · Economics · ages 16-18

Name ______________________ Date ____________

In the bathtub picture, what is the national debt?
- The water flowing in during one year
- All the water sitting in the tub
- The size of the drain hole
What is a budget deficit?
- Spending above taxes across one year
- All borrowing piled up over many years
- Taxes above spending across one year
A single year's budget sets out that year's deficit, while the debt is the stock measured at a point in time.
Circle one: True False
How do automatic stabilizers fight a recession?
- Tax and support rules act alone
- Parliament must vote emergency taxes each month
- The central bank sets all tax rates
What is a government trying to do when it spends into a downturn?
- To cool an overheating economy by cutting demand
- To balance the budget exactly every year
- To lift demand by spending more or taxing less
The government borrows big to spend. What is the crowding-out catch?
- Firms invest more because loans get cheaper
- Government borrowing lifts rates and firms delay projects
- Households save less because taxes vanish
When would borrowing escape the burden charge?
- Borrowing that heals the economy need not burden the future
- All borrowing always shrinks the economy
- Debts and deficits are the same number
Rates rose after big borrowing and firms shelved factories. Which argument does this support?
- It proves deficits never matter at all
- It proves surpluses cause recessions
- It fits a burden view, since future budgets pay interest instead of services

Answer key

For grown-ups. Fold this page away before handing over the rest.

All the water sitting in the tub · Yearly inflow is the deficit, while everything accumulated is the debt stock.
Spending above taxes across one year · A deficit is the one-year gap; the pile of borrowing across years is the debt.
True · One budget sets out one year's deficit, while the debt is the stock measured at a point in time.
Tax and support rules act alone · Built-in rules soften slumps alone and pull back gently when growth returns.
To lift demand by spending more or taxing less · Expansionary policy puts money in households' hands so demand rises and the slump heals.
Government borrowing lifts rates and firms delay projects · The state competes for the same savings pool, so loans cost more and private projects wait.
Borrowing that heals the economy need not burden the future · If deficit spending restores growth, the larger economy carries the debt more easily.
It fits a burden view, since future budgets pay interest instead of services · Heavy borrowing can saddle tomorrow with interest costs, which is the burden argument.