A default in the past makes it much more likely that a government will default again, even if the current government is a new regime with every intention of honoring its debts. Why might that be?
What will be an ideal response?
Given the history of default, the government will be able to borrow at all only by paying a relatively high interest rate. Willingness to bear a high cost of borrowing implies that the government feels compelled to spend more than the revenues it can raise. The willingness of creditors to buy the debt implies optimism about future growth and ability to avoid default. A negative macroeconomic shock will both reduce revenue and necessitate increased spending to counteract the economic decline. Tax rates cannot be increased without causing distortions that weaken the economy even further. If creditors are willing to finance more debt, the budget becomes more fragile. If (when) new credit is not available, the government has neither means nor incentive to honor the existing debts.
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Unlike firms that sell stock in financial markets, which are known as ________ firms, companies which do not sell stock in financial markets are known as ________ firms
A) public; private B) corporate; proprietary C) open; closed D) stock market; bond market
Rent seeking refers to
a. what landlords do b. looking for an apartment c. capturing the economic results of government-created scarcity d. all profit-making activity e. all of the above