4.5 - National Debts

Question 1

What is national debt?

Answer 1

Measure of accumulated national debt owed by govt sector

Question 2

Which factors influence the size of national debts?

Answer 2

Scale of spending
Tax revenues
Cost of servicing debt + bail outs

Question 3

What can debt servicing + bail outs consist of?

Answer 3

Bond payments
Business rescue
Willingness of lenders to give govt credit

Question 4

What are the arguments that a rising national debt causes problems?

Answer 4

Rising tax burden
Future tax burden - Unfair?
Interest burden

Question 5

What is the interest burden?

Answer 5

Interest paid on debt
Significant opp. cost
Lost spending potential

Question 6

What are the arguments for govt borrowing?

Answer 6

Fund spending - Fill capacity, AD etc
LRAS
Makes sense when IR low

Question 7

How can national debt harm business investment?

Answer 7

Raises market IR
Cause of crowding out

Question 8

How does debt lead to the transfer of wealth?

Answer 8

Interest payments funded by tax
Paid to wealthy individuals who have loaned govt money

Question 9

How can national debt lead to a currency crisis?

Answer 9

Foreign investors dissuaded
Reliability concerns
Demand + value fall

Question 10

What are the potential impacts of high national debt?

Answer 10

Rising tax burden
Rising market IR
Crowding Out
Wealth Effect
Currency depreciation