IB International Economics Higher Level (HL) Practice Exam 2025 - Free IB Economics HL Practice Questions and Study Guide

A prolonged budget deficit occurs when a government spends more than it earns in revenue over a significant period. As a result, it often needs to borrow funds to cover this shortfall. The accumulation of public debt is a direct consequence of this borrowing. When the government runs a deficit, it issues government bonds or takes loans, which increases its overall debt level.

This accumulation of public debt can lead to several economic implications, such as higher interest payments in the future and potential crowding out of private investment. Investors may demand higher interest rates on government bonds if they perceive increased risk associated with high levels of debt, leading to potential negative consequences for the economy.

Thus, the correct answer reflects a fundamental understanding of fiscal policy and public finance, demonstrating how consistent deficits lead to increasing obligations that shape economic conditions.

In contrast, a prolonged budget deficit is unlikely to lead to higher national savings or increased government revenue; generally, it may have the opposite effect. Economic growth may also be stunted because high public debt can lead to reduced public investment in essential services and infrastructure necessary for a growing economy.