4) "Americans face the most predictable economic crisis in this nation's history. Absent reform, the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by investors in government's ability to pay its bills will drive interest rates up, increasing borrowing costs for government, small businesses and families alike. A vicious cycle of debt will compound upon itself; the available exit options once the crisis hits will be limited; and all will involve pain" - Paul Ryan, Path to Prosperity, 2012. Answer the following questions: a) How can a deterioration of investor confidence drive interest rate up? Explain and show on a relevant graph. How can high interest rates impact exchange rates? What does that mean for trade balance and flow of international capital? Explain and show on a relevant graph. (9) b) Why will the rise in interest rates hurt businesses and households? How can households also benefit from high interest rates? (3) c) Increasing government debt is not necessarily always a problem. Under what condition may accumulation of debt not cause reason to worry? What must the government do to achieve the condition? (3)
4) "Americans face the most predictable economic crisis in this nation's history. Absent reform, the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by investors in government's ability to pay its bills will drive interest rates up, increasing borrowing costs for government, small businesses and families alike. A vicious cycle of debt will compound upon itself; the available exit options once the crisis hits will be limited; and all will involve pain" - Paul Ryan, Path to Prosperity, 2012. Answer the following questions: a) How can a deterioration of investor confidence drive interest rate up? Explain and show on a relevant graph. How can high interest rates impact exchange rates? What does that mean for trade balance and flow of international capital? Explain and show on a relevant graph. (9) b) Why will the rise in interest rates hurt businesses and households? How can households also benefit from high interest rates? (3) c) Increasing government debt is not necessarily always a problem. Under what condition may accumulation of debt not cause reason to worry? What must the government do to achieve the condition? (3)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:4) "Americans face the most predictable economic crisis in this nation's history. Absent reform,
the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by
investors in government's ability to pay its bills will drive interest rates up, increasing
borrowing costs for government, small businesses and families alike. A vicious cycle of debt will
compound upon itself; the available exit options once the crisis hits will be limited; and all will
involve pain" - Paul Ryan, Path to Prosperity, 2012. Answer the following questions:
a) How can a deterioration of investor confidence drive interest rate up? Explain and show on a
relevant graph. How can high interest rates impact exchange rates? What does that mean for
trade balance and flow of international capital? Explain and show on a relevant graph. (9)
b) Why will the rise in interest rates hurt businesses and households? How can households also
benefit from high interest rates? (3)
c) Increasing government debt is not necessarily always a problem. Under what condition may
accumulation of debt not cause reason to worry? What must the government do to achieve the
condition? (3)
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