Question

Suppose a country is projecting a deficit of $20 million next year. Which of the following events would add most to the debt? All of the above would increase the debt by the same amount. An increase in the deficit of $500,000. A 3% rise in the interest rate. An increase in tax revenues of $600,000.

Answer 1

Answer:

A 3% rise in the interest rate would most add to the debt.

Explanation:

When a country is projecting a deficit of 20 million next year, the expenses

of the government are more than the revenue by 20 million.  

To fund the expenses, the country has to borrow 20 million.  

A. An increase in the deficit by 500000 will add to the debt by that same amount.

The country's debt will increase by 500000.

B. A 3% rise in the interest rate means that the country has to pay 3% more

on 20 million. 3% of 20 million is equal to 600000.    

The debt will increase by 600000.    

C. An increase in tax revenues by 600000 mean that the country's deficit  

will reduce by 600000.

The country's debt will reduce by 600000.