Under what condition can the U.S.government continue to pay interest on a rising debt without eventually needing to increase the average tax rate?
A) If the national debt grows at the same rate as nominal GDP
B) If the nominal interest on the national debt grows faster than nominal GDP
C) If the total interest payments on the national debt grow faster than nominal GDP
D) If the national debt grows faster than nominal GDP
E) If the real interest on the national debt grows faster than real GDP.

Question

Quizplus · Accepted Answer

If the national debt grows at the same rate as nominal GDP, the ratio of debt to GDP remains constant. This means that even though the interest on the debt is increasing, there is an increase in the tax base due to economic growth. This allows the government to continue to pay interest on the debt without requiring an increase in the average tax rate. Option B, C, and D indicate that the debt is increasing faster than GDP, which would require an increase in the average tax rate to continue paying the interest on the debt. Option E is not a relevant factor in this context as it considers real interest and real GDP, which would have different effects on the debt burden.

Under What Condition Can the U