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Economics IGCSEPDF 87
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Q3.3: Consequences of Persistent Budget Deficit (8
Marks)
P1: Negative Financial/Macro Consequences
○ K: A persistent deficit means the government must borrow heavily, increasing the
national debt.
An: Increased borrowing can put upward pressure on interest rates (as the
government competes for funds), potentially crowding out private investment
and consumption.
○ An: Servicing (paying interest on) the debt becomes a large and growing
mandatory expenditure item, diverting tax money away from productive public
services like education and healthcare.
P2: Potential Positive/Demand-Side Consequences
○ K: If the deficit is caused by funding significant infrastructure or education
projects, it can boost Aggregate Supply (AS).
○ An: A deficit is often necessary during a deep recession to stimulate AD and
prevent the economy from collapsing into prolonged unemployment.
EVALUATION:
○ A deficit caused by necessary counter-cyclical spending is acceptable in the
short term. However, a persistent, structural deficit (even in a boom) is
dangerous, as it leads to unsustainable debt levels and higher future taxes,
reducing long-term growth prospects.
4.4 Monetary Policy
Effective Definitions
Monetary Policy:
Central Bank
money and rateofinterest
Actions taken by the
to influence the supply of
in an economy.
Interest Rate: The price of borrowing
money, or the reward for saving money,
usually expressed as a percentage per year.
Central Bank: The main financial institution
responsible for implementing monetary