Question

Rank (a) What are three possible problems with having a national debt? (b) Which problem do you see as most serious? Explain.

Answer 1

a. National debt or government debt is incurred when the government spends more than it receives in the form of recenues.

• National debt can lead to many serious issues. Three of them are :

1. Rise in taxes and fall in Government spendings : when the interest rates rise as a result of the rise in national debt, the tax rates in the Economy become higher. This will eventually lead to cuts in spending which will lower the future incomes of people.
2. Fall in wages and national savings : Due to the rise in interest rates, savings rate fall and the investments become unattractive to the people. This will also lead to a decline in their wage or income levels.
3. Fiscal Risks : fiscal risks caused as a result of national debt will make the investments unattractive due to the decline in the value of the government securities. The various depository institutions fail as a result of this risk.

b. According to me Fiscal crisis is the most serious consequence of national debt. This is because when National debt rises, the ecomomy faces more serious issues as a result of this risk.

During a fiscal crisis, the market fails when the investments decline as a result of the decrease in the market value of various government securities. This will eventually lead to the decline of various financial institutions which pose a serious impact on the people as their purchasing power decline further leading to decline in output and welfare.