When there are credit market imperfections, an increase in government debt may be advantageous because it
A) discourages credit-constrained consumers from borrowing too much.
B) increases the welfare of credit-constrained consumers.
C) eliminates the problems that cause credit market imperfections.
D) encourages more private saving.
E) borrows at higher interest rates than consumers.

Question

Quizplus · Accepted Answer

Credit market imperfections can make it difficult for credit-constrained consumers to access credit. An increase in government debt can increase the availability of credit and improve the welfare of these consumers. However, it is important to note that excessive levels of government debt can also lead to economic instability and may have negative consequences in the long run.

When There Are Credit Market Imperfections, an Increase in Government