3 Use US Treasury site wwwtreasurydirectgov to record the si

3. Use US Treasury site (www.treasurydirect.gov) to record the size of the total public debt. Some people think that a large public debt will bankrupt the United States government because the government will not be able to meet its financial obligations. Do you agree or not that large debt a problem? Explain why.

Solution

Yes we do agree large debt is a problem. The reason that the Govt must raise sufficient resources to finance its debt. Now the increased revenue usually comes at the expense of higher taxes. This discourage private investment and thus growth. But more often than not, Govt resorts to raising debt. This Leds to crowding out effect and thus decreases growth rate. Govt can raise new loans to retire old debt but when debt keeps growing investors are reluctant to lend and demand higher interest rates. This Leds to debt crisis as happened recently in Greece where investors came to conclusion that Govt can not pay back debt.