Chapter 11.2

Question 1

The Meaning of Government Debt

What is government debt?

Answer 1

Amount of money that a government owes to lenders outside the government itself

Question 2

The Meaning of Government Debt

What is the government budget?

Answer 2

Type of plan of a country’s revenues and expenditures over a period of time

Question 3

The Meaning of Government Debt

How is government revenue generated?

Answer 3

Taxes

Question 4

The Meaning of Government Debt

What do government expenditures consist of?

Answer 4

-Wages to government employees,
-Provision of merit goods,
-Investments in infrastructure -Transfer payments

Question 5

The Meaning of Government Debt

When will there be a balanced budget?

Answer 5

When revenues = expenditures

Question 6

The Meaning of Government Debt

When will there be a budget surplus?

Answer 6

When revenues are greater than expenditures

Question 7

The Meaning of Government Debt

When will there be a budget deficit?

Answer 7

When revenues are less than expenditures

Question 8

How Government Debt Arises

How do governments pay for deficit?

Answer 8

By borrowing, which allows governments to continue to spend without having to increase taxes

Question 9

How Government Debt Arises

What is sustainable debt?

Answer 9

A level of debt where the borrwoing government has enough revenues to meet its obligations while also allowing economic growth to occur at an acceptable rate

Question 10

How Government Debt Arises

How do governments borrow?

Answer 10

Issue bonds, which are a form of debt

Question 11

How Government Debt Arises

Why is there an incentive for individuals to buy bonds?

Answer 11

Due to interest rate they receive

Question 12

How Government Debt Arises

What is a common way to measure the size of a country’s government debt?

Answer 12

Debt-to GDP ratio

Question 13

Costs of High Levels of Debt

What are the costsof high levels of debt?

Answer 13

-Debt servicing costs
-Poor credit ratings
-Impacts of future taxation and government spending
-Possibility of debt trap
-Increased income inequality

Question 14

Costs of High Levels of Debt

How do debt servicing costs arise from high levels of debt?

Answer 14

Debt servicing refers to repaying the pricipal plus interest payments, large payments have major opportunity costs. If there were external debts, then the government has to use export spending to pay for debt servicing resulting in less foreign exchange for imports

Question 15

Costs of High Levels of Debt

How does poor credit rating arise from high levels of debt?

Answer 15

-A credit rating is an assessment of the ability of a borrower to pay back loans. A low credit rating means that a government may have difficulties servicing its debt

Question 16

Costs of High Levels of Debt

How does debt impact future taxation and government spending?

Answer 16

To achieve budget surpluses the government may either increase taxes, or decrease spending both are politically unfavored. In addition, achieving a surplus may lead real GDP to fall leading to recessionary gap as well as debt-to GDP ratio to increase.

Question 17

Costs of High Levels of Debt

How may a debt trap be caused by high levels of debt?

Answer 17

A debt trap involves a situation where a country must keep taking out new loans in order to pay back old ones

Question 18

Costs of High Levels of Debt

Why does the distribution of income become unequal?

Answer 18

When governments pays interest to lenders, it does so by tax revenues. Therefore there is a transfer of income away from lower income taxpayers and towards higher income bond holders