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Chapter 13: Q10. (page 283)

Why might economists be quite concerned if the annual interest payments on the US public debt sharply increase as a percentage of GDP?

Short Answer

Expert verified

A high-interest payment reduces the capacity of an economy to repay the debt. Therefore, economists stay more concerned about a rapid increase in annual interest payments on US public debt.

Step by step solution

01

Burden of interest payment on public debt

A government borrows funds in exchange for some notes or bonds, or other government securities.The cost of the public debt is the interest accumulating over the securities.A government has to return the principal amount and the interest payment on that amount to become debt-free.

Therefore, the interest payment adds to the burden of the public debt.

02

Explanation for the answer

Public debt as a percentage of GDP represents the payment capacity of the economy depending on its GDP size.If interest payment increases sharply, it becomes an alarming situation for the economy. Higher interest will weaken an economy and reduce the possibility of repaying the debt because of an overvalued burden.

Therefore, the economists are more worried about significant hikes in the annual interest payment on the public debt as a percentage of GDP.

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Most popular questions from this chapter

During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about \(2.6 trillion down to about \)2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

  1. Yes

  2. No

Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 11.7). Explain how equal-size increases in G and T could eliminate a recessionary gap and how equal-size decreases in G and T could eliminate an inflationary gap.

Which of the following would help a government reduce an inflationary output gap?

  1. Raising taxes

  2. Lowering taxes

  3. Increasing government spending

  4. Decreasing government spending

Explain how built-in (automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?

(For students who were assigned Chapter 11) Assume that, without taxes, the consumption schedule for an economy is as shown below:

GDP, Billions

Consumption, Billions
\(100120
200200
300280
400360
500440
600520
700600

  1. Graph this consumption schedule. What is the size of the MPC?

  2. Assume that a lump-sum (regressive) tax of \)10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.

  3. Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule, and calculate the MPC and the multiplier.

  4. Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is \(100, 5 percent at \)200, 10 percent at \(300, 15 percent at \)400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.

  5. Use a graph similar to Figure 13.3 to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.
See all solutions

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