Question

As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will O reduce private investment. increase private investment Ohave no effect of private investment. O increase interest rates. O both (a) and (d)

Answer 1

1) As a result of government borrowing to cover deficits, citizens increase the supply of saving to provide themselves with funds to pay anticipated increase in future taxes. then it follows that increased government borrowing will :

(e) both (a) and (d) I. e. Reduce private investment and increase interest rates

Higher interest rates on government bonds tend to push up other interest rates in the economy and reduce spending and investment. (This impact of higher interest rates in reducing private sector spending is known as financial crowding out)

2) Government borrowing will:

(b) increase government interest cost

Government borrowing can affect economic growth because it will tend to raise the rate of interest hence this increase in rate of interest will make capital investment less profitable resulting in a fall in investment, slower economic growth and reduction in the competitiveness of the industries.

3)  The largest portfolio of the net federal debt outstanding is owed to:

(b) U. S. Citizens and companies

The top holder by far is U.S. citizens and American entities, such as state and local governments, pension funds, mutual funds, and the Federal Reserve. Together they own the vast majority 67.5% of the debt. Foreign nations only hold 32.5% of the total debt.

4) The debt of state and local government is mostly:

(a) Internal

   state and local government debt issuance is constrained by the financial markets. As with any borrower, state and local governments need willing creditors to incur debt. The relative safety of state and local government debt and the federal income tax exclusion on interest payments on state and local bonds has created a strong demand for state and local government debt.