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Effects of Public Debt on Economic Stability - Public Finance | Public Finance - B Com PDF Download

National Debt and Economic Stability:

 

Whenever national loans are increased, they can lead to economic instability in the country. In fact there is nothing good or bad with the debts; It all depends upon the wisdom of the administration. If the government takes loans for purposes of economic development and constructs dams, railways, canals, factories, roads, etc., then the productive capacity of the nation goes up and it leads to economic stability.

If debts are raised for consumption expenditure and the productive capacity of the nation is not increased, then they lead to economic instability in the country. In order, to examine the economic effects of public debt, we will have to examine the following matter:

(i) The Amount of Loan. If the economy is functioning at the level of full employment, even a small amount of loan will create inflationary pressure in the economy. How much the price inflation will take place depends upon the amount of borrowing. The greater the borrowing, the heavier is the degree of inflation and vice versa.

(ii) Purpose of Loan. If the country is in the grip of depression and the loan is raised for productive purposes, it will increase income, output and employment in the economy. As the aggregate demand is increased with public debt, therefore, it has a healthy effect on the economy. If public loans are raised for fighting a war, it cripples the productive capacity of the nation and becomes a deadweight debt. These, therefore, result in the instability of the economy.

(iii) Internal Loan and External Loan. Public debt whether it is internal or external constitutes a burden on the commodity. The nature of burden of external debt, however, differs from the internal, debts. In case of external debt, the loan along with the rate of interest is to be paid to the creditor country. This means we deprive the citizens of our own country with the goods and services produced at home.

If the external loan is used for economic development, It will have a healthy effect on the economy, In case, it is used for consumption purposes or for waging a war, then they are burden on the community. It in fact is mortgaging of future.

The internal loans are raised from the central bank, commercial banks, and the people living in the country. If the internal debt is utilized for consumption expenditure, it will lead to inflationary pressure in the economy. If it is used for productive purposes (if excess capacity is not achieved), it will help in raising the level of income and employment and thus will lead to economic stability.

(iv) Rate of Interest. if a huge amount of public loan is incurred at a. higher rate of interest, it will take away a sizable portion of the national income for its repayment. The economic stability of the country will, thus, be adversely affected.

The document Effects of Public Debt on Economic Stability - Public Finance | Public Finance - B Com is a part of the B Com Course Public Finance.
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FAQs on Effects of Public Debt on Economic Stability - Public Finance - Public Finance - B Com

1. What is public debt and how does it impact economic stability?
Ans. Public debt refers to the total amount of money that a government owes to external lenders or its own citizens. It is usually in the form of government bonds or treasury bills. The impact of public debt on economic stability can be both positive and negative. On one hand, public debt can stimulate economic growth by funding public investments and infrastructure projects. On the other hand, excessive public debt can lead to higher interest rates, inflation, and reduced investor confidence, which can destabilize the economy.
2. How does public debt affect interest rates?
Ans. Public debt can impact interest rates in several ways. When the government borrows money to finance its debt, it increases the demand for loanable funds, causing interest rates to rise. This is because lenders require higher returns to compensate for the increased risk associated with lending to a heavily indebted government. Higher interest rates can have negative effects on the economy, such as discouraging private investment and increasing the cost of borrowing for consumers and businesses.
3. What are the consequences of high public debt on inflation?
Ans. High public debt can contribute to inflation if the government decides to finance its debt by printing more money. This increases the money supply in the economy, leading to a decrease in the value of each unit of currency. As a result, prices of goods and services rise, causing inflation. Additionally, high public debt can erode investor confidence, leading to a depreciation in the value of the currency, which can also contribute to inflation.
4. How does public debt affect fiscal policy options?
Ans. High levels of public debt can limit fiscal policy options for a government. When a significant portion of government revenue is allocated towards servicing debt, it leaves less room for spending on public goods, social programs, and investments. This can hinder a government's ability to stimulate economic growth or respond to economic downturns through fiscal policy measures such as tax cuts or increased government spending. It can also lead to a higher reliance on austerity measures, which can further dampen economic stability.
5. How does public debt impact investor confidence?
Ans. Public debt plays a crucial role in determining investor confidence. Excessive public debt can raise concerns among investors about a government's ability to repay its debt obligations. This uncertainty can lead to a decrease in demand for government bonds and an increase in borrowing costs for the government. A loss of investor confidence can also result in a depreciation of the currency and capital flight, as investors seek safer investment opportunities. All of these factors can negatively impact economic stability and growth.
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