Budget Deficit vs National Debt
Budget Deficit and National Debt are two Fiscal Policy concepts in AP Economics that students often mix up. In short: budget deficit is a budget deficit occurs when government spending exceeds its tax revenue in a given year. Meanwhile, national debt is the national debt is the total accumulated amount the government owes from past deficits not offset by surpluses. Here is how they compare side by side.
A budget deficit occurs when government spending exceeds its tax revenue in a given year.
Governments finance deficits by borrowing, which adds to the national debt. Deficits can stimulate a weak economy but may raise interest rates and crowd out private investment. They typically grow during recessions.
The national debt is the total accumulated amount the government owes from past deficits not offset by surpluses.
It is a stock that grows whenever the government runs a deficit, unlike the deficit, which is an annual flow. Large debt can raise interest costs and crowd out private investment. It is often measured as a percentage of GDP.
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