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Policy Instruments (A2)

Control of the national (public sector) debt: Implications

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Implications.

What you need to know

Answer each one before you reveal it.

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Key term

What confidence issues can arise when public sector debt is high and existing debt matures?

Key term

Explain how high public sector debt may cause crowding out.

Key term

What is the potential long-term growth consequence of crowding out caused by high public debt?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What confidence issues can arise when public sector debt is high and existing debt matures?

    Model answer

    Markets may become unwilling to lend or may demand higher interest rates when refinancing is needed.

  2. 2

    Explain how high public sector debt may cause crowding out.

    Model answer

    Government borrowing competes with private sector borrowing for available funds, raising interest rates and reducing private investment.

  3. 3

    What is the potential long-term growth consequence of crowding out caused by high public debt?

    Model answer

    Slower economic growth due to reduced private sector capital formation.

  4. 4

    Why might tightening fiscal policy during an economic downturn be counterproductive?

    Model answer

    It reduces aggregate demand further, potentially deepening the recession rather than improving the fiscal position.

  5. 5

    How might austerity during a downturn actually worsen the cyclical deficit?

    Model answer

    By reducing economic activity, it lowers tax revenues and increases automatic stabiliser spending, potentially failing to reduce the overall deficit.

  6. 6

    State one argument in favour of fiscal tightening during an economic downturn.

    Model answer

    Maintaining market confidence, avoiding credit downgrades, or preventing debt from reaching unsustainable levels.

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