A government has consistently run a primary deficit, with non-interest expenditures exceeding tax revenues by 3% of national income each year. Due to concerns about the country's economic stability, the interest rates the government must pay on its national debt rise sharply. What is the most direct and immediate impact of these higher interest rates on the government's total budget deficit?
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Government Deficit Financing Options
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A government that consistently runs a primary deficit (where non-interest spending exceeds tax revenue) equal to 3% of its national income is guaranteed to experience a continuous increase in its total national debt as a percentage of national income.
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A government has consistently run a primary deficit, with non-interest expenditures exceeding tax revenues by 3% of national income each year. Due to concerns about the country's economic stability, the interest rates the government must pay on its national debt rise sharply. What is the most direct and immediate impact of these higher interest rates on the government's total budget deficit?