Which financial instrument is commonly used by governments to finance budget def
Practice Questions
Q1
Which financial instrument is commonly used by governments to finance budget deficits?
Stocks
Bonds
Mutual funds
Derivatives
Questions & Step-by-Step Solutions
Which financial instrument is commonly used by governments to finance budget deficits?
Step 1: Understand that a budget deficit occurs when a government's expenses exceed its revenues.
Step 2: Recognize that to cover this deficit, the government needs to borrow money.
Step 3: Learn that one common way for governments to borrow money is by issuing bonds.
Step 4: Know that a bond is a financial instrument where investors lend money to the government in exchange for periodic interest payments and the return of the bond's face value at maturity.
Step 5: Conclude that by issuing bonds, the government can raise the funds needed to finance its budget deficit.
