Budget deficits finance spending via borrowing, impacting debt and trade

Steps:

• Budget deficit occurs when government spending exceeds revenue in a year.
• To cover the shortfall, government increases borrowing from markets or public.
• This borrowing adds to the national debt stock.
• Higher borrowing raises interest rates, appreciating the currency and reducing net exports via crowding out.

Why B is correct:

• Rising deficits increase domestic interest rates, strengthening the currency and making exports less competitive, so exports fall, not rise (per Mundell-Fleming model).

Why the others are wrong:

• A: Deficits directly require more government borrowing to finance the gap.
• C: Annual borrowing from deficits accumulates into higher national debt.
• D: Excess demand from deficits can cause inflationary pressures.

Final answer: B