3.3 Macroeconomic Objectives — Sustainable Level Of Governement Debt

Question 1

What is government debt

Answer 1

Refers to the amount of money that a government owes to lenders outside of the government itself

Question 2

What is a government budget

Answer 2

A type of plan o a country’s revenues and expenditures over a period of time

Question 3

What is a budget deficit and budget surplus

Answer 3

Budget deficit — if expenditures are larger then tax revenues

Budget surplus — if expenderse are smaller then tax revenues

During budget deficit , government finances extra expenditure over revenues by borrowing

Question 4

What is sustainable debt

Answer 4

Refers to a level of debt where the borrowing f government has enough revenues to meet its debt obligation without accumulating overdue debt payments while also allowing economic growth

Question 5

How do governments borrow

Answer 5

By issuing bonds - which promises to pay interest at various intervals until the money is repaid

The holder of the bond is the lender and the issuer of the the bond is the borrower

Question 6

How to measure size of country’s government debt

Answer 6

As a share of GDP of the borrowing country - refereed to as debt-to-GDP ratio

Question 7

Cost of high levels of debt

Answer 7

Debt servicing costs - the payments that must be made in order to repay the principle + interest payments - large debt service payments leave goverment with less money to spend on other sectors

Poor credit ratings - low credit means government may have difficulties paying its debt - makes it more difficult to borrow in the future + government has high debt-to-GDP ratio has lower credit rating

Impacts on future taxation and government spending - if government wants to decrease debts must have budget surplus - does this through increased taxation or decreased spending - decreased in AD, fall in real GDP , worse debt-to-GDP ratio

Increased income inequality - increase inequality as lenders tend to be high income people, they receive interest which is paid by tax revenue, taking income away from lower income tax payers

Lower economic growth - lower government spending, increased taxation - lower real GDP growth