Final answer:
Governments may run deficits to stimulate the economy, cover emergencies, reduce taxes for popularity, or fund wars. They borrow the funds needed to cover deficits by selling Treasury bonds, notes, and bills. Running deficits can still result in a falling debt/GDP ratio if GDP grows sufficiently.
Step-by-step explanation:
Running a deficit can occur for several reasons, including:
- A) To moderate negative trends in the economy: During economic declines, running deficits can be part of an economic stimulus strategy to help jump-start growth.
- B) To cover for emergencies: Unexpected situations, such as natural disasters or health crises, may require additional spending beyond the budget.
- C) To reduce taxes and maintain low tax rates for popularity: Sometimes, governments cut or keep taxes low to gain public favor, leading to spending that surpasses revenue.
- D) During international conflict, such as war: Increased military and defense spending can result in deficits.
- E) All of the above are valid scenarios where a government might opt to run a deficit.
Moreover, when governments run budget deficits, they typically make up the difference by selling Treasury bonds, notes, and bills. Contrastingly, budget surpluses can be used to pay down the national debt or refunded to taxpayers. It's noteworthy that running a budget deficit doesn't always mean the debt/GDP ratio will rise; If GDP grows faster than the increase in debt due to the deficit, the ratio can actually decline.