Is having to make interest payments on the national debt detrimental to the economy? Or does the income bondholders receive offset the deadweight loss of taxation?
Dette is the French word from where the word Debt is originated. Debt means money, which is to be given to its rightful owner. Debt is comprised of both public and private debt. Interest is the extra charge or fine, which is given on the principal amount to the creditor.
Answer and Explanation:
Yes, making interest payments on the national debt is detrimental to the economy. It put a burden on the exchequers of the country. High-interest payment on the national debt forces the government to levy high taxes on the people. This will ultimately reduce the purchasing power of the people, and eventually decline in demand will cause a slowdown in an economy.
Whether income received by the bondholders will offset the deadweight loss of taxation depends upon the level of income increased, and the level of tax is levied. If tax levied is high than the income received, then there will be loss of welfare in the economy and vice-versa.
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7