Question

What part does interest play in deficit spending?

Governments must pay interest on money they borrow when they take on debt.
Citizens must pay interest when their governments borrow money.
Governments may charge foreign countries interest when they borrow money.
Interest is not a factor when a government’s budget is in deficit.

Answer 1

Correct answer: 1 only.

Explanation:
- 1 is true — when a government borrows (issues bonds), it must pay interest to the holders of that debt.
- 2 is misleading/false as written — citizens do not directly pay interest to the government when the government borrows. They may indirectly bear the cost (via taxes, inflation, or reduced services) and some citizens who hold government bonds receive the interest.
- 3 is poorly phrased and therefore incorrect here — a government can charge interest if it lends to another country, but it does not “charge foreign countries interest when they borrow” in the ordinary case of the government itself borrowing.
- 4 is false — interest payments on existing debt are a real component of the budget and can increase the deficit (and the need to borrow more).