Final answer:
The government increases its borrowing by issuing new debt in the form of Treasury bonds, notes, and bills. Rising government debt leads to higher interest payments, which can contribute to larger budget deficits. Fiscal responsibility is crucial to avoid negative economic consequences, like reduced private sector capital, and potential austerity measures due to rising interest costs.
Step-by-step explanation:
When the government issues new debt, it does so by selling Treasury bonds, notes, and bills. This increases government borrowing and can be used to pay down the national debt or be refunded to taxpayers.
It is true that as debt increases, interest payments also rise, which can lead to a growing deficit if other government spending remains constant. Additionally, a nation can still see its debt/GDP ratio decline if the GDP growth outpaces the growth in debt. However, this is dependent on economic conditions and fiscal policy.
Fiscal responsibility is essential to avoid reducing the financial capital available to the private sector and to prevent financial crises. Moreover, running budget deficits may lead governments to take steps that can have a contractionary effect on aggregate demand, influencing economic growth negatively.
Interest rates might also rise in response to increases in debt, which would make the cost of financing the debt higher, potentially leading to spending cuts and tax increases. These issues highlight the importance of understanding the impact of government borrowing and debt on a nation's economy.