If government debt reduction by a small open economy has no effect on its interest rate I: the benefits of debt reduction follow from the fact that future generations have smaller debt service payments to foreigners.II: the benefits of debt reduction will be charged by all workers since each worker has more capital to work with.

Question

Quizplus · Accepted Answer

If government debt reduction by a small open economy has no effect on its interest rate, then the benefits of debt reduction would come from the fact that future generations have smaller debt service payments to foreign lenders. This is the idea presented in statement I and is true. However, statement II is not true as debt reduction does not necessarily lead to an increase in capital per worker.

If Government Debt Reduction by a Small Open Economy Has