One possible problem with running continuous budget deficits is that the spending builds up over time and with inflation eventually becoming the risk that has to be managed.
Answer: False
The answer is False.
This question tests whether you understand that fiscal deficits are just the outcome of two flows which have a finite lifespan. Flows typically feed into stocks (increase or decrease them) and in the case of deficits, under current institutional arrangements, they increase public debt holdings.
So the expenditure impacts of deficit exhaust each period and underpin production and income generation and saving. Aggregate saving is also a flow but can add to stocks of financial assets when stored.
Under current institutional arrangements (where governments unnecessarily issue debt to match its net spending $-for-$) the deficits will also lead to a rise in the stock of public debt outstanding. But of-course, the increase in debt is not a consequence of any "financing" imperative for the government. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
Flows are like a video that you stream continuously from a camera whereas stocks are like a photo you snap on your camera. Flows are gone once they have passed whereas a stock lingers.
People often think that running a fiscal surplus today provides more capacity to the government to spend tomorrow - as if there is an accumulation process operating. But a fiscal balance is just two flows that are gone once they flow.
A fiscal deficit or surplus observed today provides a currency-issuing government with no extra or no less capacity to spend tomorrow.
So an understanding of stocks and flows helps sort out some furphies.
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