Describe the government budget constraint.

• A. The government can run deficits forever without any consequences.
• B. The government must finance expenditures with taxes, debt issuance, or money creation; deficits raise the debt; the constraint links revenue, spending, and debt.
• C. Debt issuance alone finances deficits.
• D. The constraint is unrelated to revenue and spending.

Answer: (D)

The government budget constraint shows how government spending must be paid for with current revenues and/or changes in financing. In simple terms, what the government spends is funded by taxes and other receipts, plus the change in government financing through debt or money creation. If spending exceeds revenue, the gap is financed by issuing debt or by increasing the money supply, so deficits raise the stock of debt. This creates a direct link among revenue, spending, and debt, because every higher deficit changes the government’s debt level and future obligations. It’s not true that deficits can go on forever without consequences, and financing gaps isn’t restricted to debt issuance alone—taxes or money creation can also play a role, while the core point remains that revenue and spending determine the need to borrow or monetize.