Quiz : Special Topic 8 the Economics of Health Care

Business

The national debt is the total amount of loan that the federal government took from various parties for financing the budget deficit. The government uses debt if it is plan not to increase taxes to finance its current expenditure. The Federal government cannot increase its debt indefinitely because the credit worthiness of a government depends upon its debt to income ration. An increase in this ratio means the government has large interest payment and servicing of debt becomes more difficult. As a result the government uses money creation to service its debt and inflation soared high which puts a serious threat on the economy. So the government must pay the part of its debt, if not all, from time to time.

The national debt is the total amount of loan that the federal government took from various parties for financing the budget deficit. The government uses debt if it is plan not to increase taxes to finance its current expenditure. The national debt is held by the various agencies of Federal government. It is a loan that one government agencies make to another and represents a mere accounting transaction between two government agencies. The interest liability of the national debt is practically zero to the government. The national debt is indicative of money creation for future government expenditure. On the other hand, the privately held government debt is held by domestic and foreign investors. The government is liable to pay the interest on these loans and servicing of the debt requires increase in taxation. The privately held bonds are also including the external debt or loan made by the foreigner. It implies that foreigners are ready to make investment at lower interest rate. The inflow of loanable funds decreases the domestic interest rate that stimulates investment and growth. The difference between these two debts is that the later places the net liability of interest rate on the government and indicative of the increase in future taxes. The increase in debt put private investment on hold and interest rate soared high. The increase in interest rate increases the inflow of foreign capital into the country. As the foreign investor need domestic currency to buy the bonds the domestic currency appreciates. This makes imports dearer and exports expensive to foreigners. The net export decreases. The external debt also increases the income of the foreigners and domestic income decreases. Thus the size of the privately owned debt matters as it decreases the income and increases taxes on future generation.

The national debt is the total amount of loan that the federal government took from various parties for financing the budget deficit. The government uses debt if it is plan not to increase taxes to finance its current expenditure. The increase in debt put private investment on hold and interest rate soared high. The increase in interest rate increases the inflow of foreign capital into the country. As the foreign investor need domestic currency to buy the bonds the domestic currency appreciates. This makes imports dearer and exports expensive to foreigners. The net export decreases. The external debt also increases the income of the foreigners and decreases domestic income. On the other hand, the willingness of the foreign investors in US bonds means that they are willing to invest at lower interest rate. This increases the supply of loanable fund in the economy and interest rate decreases. The lower investment stimulates investment and promotes growth. Therefore, if the government prohibits the foreigner to invest, this will decrease the loanable fund and foreign investment and will put a threat to economic growth. In other words, Americans will be worse off at this situation. Therefore, the government, should control how much the foreigners can invest that will promote growth and will no decrease the domestic income.

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