An increase in government spending financed by borrowing will result in which of the following?

• A. A decrease in government budget deficit
• B. A reduction in the money supply
• C. An increase in the national debt
• D. A decrease in aggregate demand

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the relationship between government spending, borrowing, and the budget deficit. When the government increases spending without raising taxes, it typically finances this by borrowing, which means issuing government debt.
2. Step 2: Recognize that borrowing to finance spending does not decrease the budget deficit; instead, it often increases the deficit because the government is spending more than its revenue.
3. Step 3: Analyze the impact on the money supply. Borrowing by the government usually involves selling bonds to the public or financial institutions, which does not directly reduce the money supply; it shifts funds from private to public hands.
4. Step 4: Consider the effect on aggregate demand. Increased government spending generally raises aggregate demand because government purchases are a component of aggregate demand, so aggregate demand tends to increase, not decrease.
5. Step 5: Conclude that the increase in government borrowing leads to an increase in the national debt, as the government accumulates more outstanding obligations to finance the additional spending.