Final answer:
Governments address budget deficits by borrowing and manage surpluses by paying off debt or saving. A nation's debt/GDP ratio can improve during deficits if the economy grows quickly and worsen during surpluses if the GDP declines. The federal budget differs from state and local budgets, primarily in the scale and flexibility to borrow.
Step-by-step explanation:
When governments run budget deficits, they make up the differences between tax revenue and spending by borrowing funds. This borrowing can be through issuing government bonds, taking loans from financial institutions, or other means of financing. In contrast, when governments run budget surpluses, the extra funds are typically used to pay down existing debt or are saved for future use in sovereign wealth funds or similar financial vehicles.
It is possible for a nation to run budget deficits while its debt/GDP ratio falls, if the economy is growing at a faster rate than the increase in debt. Conversely, a nation can run budget surpluses and still see its debt/GDP ratio rise if the overall economy shrinks, reducing the GDP portion of the ratio despite debt reduction efforts.
The U.S. federal budget differs from state and local budgets in several ways, including the scope of responsibilities, borrowing abilities, and the types of taxes collected. Federal budgets generally involve larger-scale financial decisions and have greater leeway in running deficits, whereas state and local governments often have balanced budget requirements that prevent them from borrowing to cover operating expenses.