Which of the following makes it more likely that a country will get caught in a vicious circle of debt financing, higher taxes, and sluggish growth?
A) Politicians like to raise taxes, but they are reluctant to spend on education, health care, and roads.
B) High levels of debt will eventually lead to higher taxes just to pay the interest on the debt, but high taxes will slow economic growth.
C) As outstanding debt increases, politicians will be reluctant to run budget deficits, which will cause the economy to slow.
D) As outstanding debt increases, short-sighted politicians will want to run large budget surpluses in order to pay off the national debt quickly.

Question

Which of the following makes it more likely that a country will get caught in a vicious circle of debt financing, higher taxes, and sluggish growth?
A) Politicians like to raise taxes, but they are reluctant to spend on education, health care, and roads.
B) High levels of debt will eventually lead to higher taxes just  to pay the interest on the debt, but high taxes will slow economic growth.
C) As outstanding debt increases, politicians will be reluctant to run budget deficits, which will cause the economy to slow.
D) As outstanding debt increases, short-sighted politicians will want to run large budget surpluses in order to pay off the national debt quickly.

Quizplus · Accepted Answer

When a country has high levels of debt, it will eventually be pressured to raise taxes just to pay interest on the debt. However, high taxes can slow down economic growth by reducing disposable income and increasing the costs of production. This can cause a vicious cycle where sluggish growth leads to lower tax revenue, which then leads to higher debt, and the cycle repeats. Therefore, option B makes it more likely that a country will get caught in a vicious circle of debt financing, higher taxes, and sluggish growth.

Which of the Following Makes It More Likely That a Country