In this causal schematic of a sovereign debt crisis: ,austerity measures designed to reduce the government deficit (point 4)may have the undesired effect of intensifying the adverse feedback loop at point 5.The source of this danger is ________.

Question

In this causal schematic of a sovereign debt crisis:  ,austerity measures designed to reduce the government deficit (point 4)may have the undesired effect of intensifying the adverse feedback loop at point 5.The source of this danger is ________.

Quizplus · Accepted Answer

Austerity measures designed to reduce government deficit may lead to contraction of the macroeconomy, reducing government revenues and worsening the debt-to-GDP ratio. This can intensify the adverse feedback loop, where concerns about the sustainability of the government's debt can lead to higher interest rates, which in turn make it harder for the government to service the debt, causing further concerns about the government's creditworthiness. This can lead to a vicious cycle, where austerity measures deepen the crisis instead of solving it.

In This Causal Schematic of a Sovereign Debt Crisis