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Question & Answer1
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Explore TopicChoose the Best Answer
A
It decreases the debt-to-GDP ratio by reducing interest rates.
B
It increases the debt-to-GDP ratio by stimulating economic growth.
C
It maintains or lowers the debt-to-GDP ratio by improving investor confidence.
D
It has no impact on the debt-to-GDP ratio.
Understanding the Answer
Let's break down why this is correct
Answer
Effective public debt management plays a crucial role in influencing the debt-to-GDP ratio, especially during contractionary monetary policy, which aims to reduce inflation by increasing interest rates. When a government manages its debt well, it can ensure that it borrows at lower interest rates and refinances existing debt efficiently, reducing the overall cost of borrowing. This is important because if the economy is slow and interest rates are high, a government may struggle to pay off its existing debt, leading to a higher debt-to-GDP ratio. For example, if a country has a total debt of $100 billion and a GDP of $200 billion, its debt-to-GDP ratio is 50%. By managing its debt effectively, it can keep this ratio stable or even lower it, making the economy appear healthier even when monetary policy is tight.
Detailed Explanation
Good public debt management can help keep the debt-to-GDP ratio steady or lower. Other options are incorrect because Some might think that lower interest rates automatically reduce debt; It’s a common mistake to think that stimulating growth always increases debt.
Key Concepts
Public debt management
Monetary policy
Debt-to-GDP ratio
Topic
Fiscal Policy and National Debt
Difficulty
hard level question
Cognitive Level
understand
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