For what reason might the United States government raise taxes instead of borrowing money to pay for a new government service? T
o avoid increasing the flow of money in the economy To avoid having to change the federal interest rate To demonstrate that people support the concept of taxation more than borrowing To avoid paying interest on savings bonds
The correct answer is: "To avoid paying interest on savings bonds".
Taxes are the main source of income for the goverment in an economy. If the level of income raised through taxes is not enough to finance goverment spending (that is used to provide public services, for example), the goverment needs to borrow funds. The goverment gets indebted by issuing public debt, using the financial instrument called bond, which is bought by investors, who are the ones who lend the money.
Borrowed funds obtained by issuing bonds, entail the <u>obligation to return them in the future, together with the corresponding interest payment. If the amount of money needed is raised using taxes instead, the goverment will avoid the interest payment. </u>
