Increases in the fraction of national debt held by foreigners __________ the burden of debt service on future generations __________.
A)decrease; because it is easier for the borrowing nation to default on the debt
B)decrease; but may make the country more vulnerable to foreign intervention
C)decrease; because debt servicing accomplished by increases in the money supply is not as inflationary as it would be if all debt were held domestically
D)increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside
E)increase; because foreign bondholding pushes up interest rates at date of issue,increasing crowding out

Question

Quizplus · Accepted Answer

When foreigners hold a larger share of a country's national debt, the burden of debt service on future generations increases because the taxes collected to pay the debt remain within the country, whereas interest payments on the debt are sent outside the country. This can lead to a transfer of wealth from the borrowing country to foreign bondholders, worsening the country's current account balance.

Increases in the Fraction of National Debt Held by Foreigners