How does a budget deficit affect a nation's economy?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is Option 2 i.e. It may lead to increased government borrowing.
A budget deficit occurs when government expenditure exceeds revenue. This situation may lead to increased government borrowing from the public or financial institutions to meet the gap. Such borrowing can raise interest rates, crowd out private investment, and increase national debt over time. While in some cases, deficit spending can stimulate short-term economic activity, it does not always guarantee immediate growth.