Test: Public Debt - Class 10 MCQ

Public debt is often utilized to bridge budgetary deficits when government expenditures exceed tax revenues. By borrowing, the government can finance necessary developmental projects, infrastructure improvements, and public services that may not be fully funded by current tax income.

Irredeemable debt is characterized by the absence of a fixed repayment date. The government may pay interest regularly, but there’s no obligation to repay the principal at a specific time. This type of borrowing is less common and can lead to long-term financial obligations.

In developing countries, infrastructure projects often require significant investment, which may not be appealing to private companies due to low immediate returns. Therefore, governments borrow to finance these critical projects, ensuring that essential infrastructure is built to support economic growth and development.

High levels of public debt may compel governments to raise taxes to meet interest and principal repayment obligations. This can lead to increased financial pressure on citizens and businesses, affecting overall economic activity and public sentiment towards government fiscal policies.

The primary risk of excessive public debt is the potential for a debt trap, where a government must borrow more to service existing debt obligations. This can lead to a cycle of increasing debt levels and financial instability, impacting economic growth and leading to higher taxes or reduced public spending.

Public debt refers to the situation where a government's planned expenditures surpass its total revenues, necessitating borrowing to cover the deficit. This borrowing can come from various sources, including individuals, banks, and international agencies. Understanding public debt is crucial as it reflects a government's financial health and its ability to manage fiscal responsibilities.

Differentiating between productive and unproductive debt is essential because productive debts are expected to generate future revenue that can help repay the debt, while unproductive debts do not create any revenue and may increase the financial burden on the government. This assessment guides fiscal policy and investment decisions.

Internal debt refers to borrowings that a government incurs from sources within its own country, such as local banks and citizens. In contrast, external debt is money borrowed from foreign entities or international organizations. This distinction is important for understanding a country's financial obligations and economic independence.

Public debt can lead to an increase in the money supply when the government borrows funds, especially from central banks like the Reserve Bank of India. This can create inflationary pressure as more money circulates in the economy, potentially leading to rising prices if not managed properly.

Productive debt is associated with loans taken for projects that have the potential to generate revenue, such as infrastructure initiatives. These loans are considered self-liquidating because the revenue generated from the projects helps pay back the principal and interest. This form of debt is beneficial for economic growth.

Government bonds and securities are a primary source of public borrowing. These instruments are sold to investors, including individuals and banks, to raise funds. Investors receive interest payments in exchange for their investment, making government bonds a popular and secure investment option.

Compulsory debt functions by requiring certain lenders or investors to purchase government bonds as a condition of doing business or under specific legal obligations. This ensures that the government can raise necessary funds but can also impose restrictions on market dynamics.

Funded debt refers to debt for which the government sets aside a separate fund to meet its repayment obligations. This type of debt is typically considered long-term and allows for more structured financial management, ensuring that the government can meet its financial commitments.

Voluntary debt occurs when the government raises funds through public debt instruments without compelling buyers to purchase them. In contrast, compulsory debt involves a requirement for certain investors to buy government bonds, resembling a tax obligation. This distinction affects how the government engages with the financial markets.

Redeemable debt refers to loans that the government is obligated to repay after a predetermined period. This type of debt allows investors to receive their principal back along with interest, making it a more predictable financial instrument for both the government and the lenders.

The internal debt of the central government in India saw a significant increase, growing from Rs 1,54,004 crore in 1990-91 to Rs 23,37,682 crore by 2009-10. This trend indicates escalating borrowing to meet government financial needs, reflecting broader economic challenges and the demand for public services and infrastructure.

External debt can result in an outflow of economic resources, as countries must make interest payments to foreign lenders. This can strain the domestic economy, particularly if large sums are required to service the debt, potentially diverting funds away from local investments and services.

Gross debt is the total amount of a government’s outstanding debts without taking into account any assets that might be used to repay them. Net debt, on the other hand, is calculated by subtracting the value of liquid assets and sinking funds from gross debt. Understanding the difference helps in evaluating a government’s financial health.

Public debt plays a vital role in financing development plans by providing necessary funds when government revenues are insufficient. This borrowing facilitates investment in infrastructure and services critical for economic growth and national development, particularly in growing economies.

Unfunded debt, or floating debt, refers to short-term borrowing that does not have a specific repayment scheme set out in advance. These debts are typically expected to be settled within a year and are often used to manage cash flow needs of the government.