What are the effects of a higher public debt compared to a higher deficit?

A higher deficit creates a higher public debt because a deficit occurs when a government's expenditures exceed its revenues within a given fiscal year. When the government runs a deficit, it typically finances this gap by borrowing, leading to an increase in public debt. Over time, these accumulated deficits add to the total amount of debt that the government owes to creditors.

This relationship is fundamental in macroeconomics since it illustrates how fiscal policy can influence national debt levels. A persistent deficit results in a growing national debt because the government needs to continuously borrow to cover its shortfalls. Understanding this dynamic is crucial for analyzing the sustainability of fiscal policies and the potential long-term consequences on the economy, such as increased interest payments and reduced fiscal flexibility.

The other choices suggest effects that don't directly correlate in the same way. For instance, higher public debt does not inherently lead to lower interest rates, nor does it automatically mean reduced foreign investment or lower current GDP, as these relationships can depend on various factors, including overall economic conditions and investor confidence.