Question

_____ occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. a. Budget deficits b. Debt crises c. Loan guarantees d. Unfunded liabilities

Short answer

The correct answer is d. Unfunded liabilities.

Step-by-step solution

Understand the Terms

Before solving the exercise, we need to understand the terms provided in the options: - **Budget deficits** occur when expenses exceed revenue. - **Debt crises** arise when a country is unable to meet debt repayment obligations. - **Loan guarantees** are commitments to cover a borrower's debt in case of default. - **Unfunded liabilities** refer to future governmental spending commitments without sufficient funding.

Analyze Descriptions

Analyze the provided description in the exercise: "...commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures." This description emphasizes a gap between future expenditure commitments and funding.

Match Exercise with Terms

Based on the understanding from Step 1, determine which term matches the description from Step 2. The situation where a government commits to future spending without corresponding revenue is typically described by the term 'unfunded liabilities.'

Select the Correct Answer

From the definitions and analysis, 'unfunded liabilities' is the situation where future spending is committed without corresponding revenue sources. Therefore, the correct answer is **d. Unfunded liabilities**.

Key concepts

Budget Deficits

A budget deficit happens when a government's expenditures surpass the revenues they generate within a specific period, usually a year. Imagine, for simplicity, if your expenses from paying rent, groceries, and other bills exceed your income from a job. That's essentially what a budget deficit is for a country.

Governments often resort to borrowing to fill the gap created by deficits, which can lead to increased national debt over time. Budget deficits can occur due to various reasons including economic downturns where tax revenues fall, or when the government increases spending on public services to stimulate growth.

However, persistent budget deficits can be concerning as they might lead to reduced investments in infrastructure or education because more funds are diverted to service the debt. In the long run, if not managed carefully, it can jeopardize a nation's economic stability.

• Results when spending surpasses income.
• Often leads to borrowing and national debt.
• Can restrict future government investment.

Debt Crises

A debt crisis occurs when a country is incapable of fulfilling its debt repayments. To draw an analogy, imagine agreeing to pay a mortgage on a house but suddenly losing your job and being unable to make your monthly payments. That's similar to what happens when a nation faces a debt crisis.

This crisis often stems from accumulating too much debt or mismanaging fiscal policies, leading to diminished trust from international creditors. Countries might then face high-interest rates on any future borrowings or may be required to implement stringent austerity measures.

Handling a debt crisis involves restructuring debt or receiving aid from international organizations, but these solutions often come with difficult conditions for the citizens.

• Arises when countries can't meet debt obligations.
• Leads to loss of trust from lenders.
• Often results in increased costs or austerity measures.

Loan Guarantees

Loan guarantees mean a pledge by a government or private institution to repay a loan if the borrower defaults. It's like having a friend promise the bank they'll cover your credit card bill if you can't.

These guarantees can help borrowers secure better terms on loans, such as lower interest rates, by reducing the lender's risk. For governments, offering loan guarantees can stimulate economic activity by encouraging lenders to finance projects that they might otherwise deem too risky.

However, if many borrowers default, the entity providing the guarantees might face significant financial strain. Thus, while loan guarantees are a tool for economic growth, they come with an inherent risk that requires careful management.

• Commitment to repay defaulted loans.
• Decreases lender's risk and can provide better loan terms.
• Can lead to financial strain if defaults are high.