What is a possible negative effect of a big increase in government debt?

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BlackTom AI · Accepted Answer

Question: What is a possible negative effect of a big increase in government debt?

Option a: Faster economic growth. While some theories suggest debt can fund productive investments, a large increase in debt is more often associated with higher risks and potential crowding out of private investment. This makes rapid growth less likely as a guaranteed outcome, so this option is not the best candidate for describing a negative effect.

Option b: Lower interest rates. In general, rising government debt tends to push up, not lower, interest rates because lenders demand higher yields to compensate for increased risk and the possibility of higher taxes or inflation. Therefore, claiming lower rates as a negative effect is inaccurate in most scenarios.

Option c: Higher future taxes or less government spending. This captures a common negative consequence: to service or reduce debt, the government may need to raise taxes or cut spending in the future. This is a direct pathway by which debt can constrain fiscal policy and have adverse effects on households and programs, making it a strong negative outcome.

Option d: More investments. While some argue debt can finance investment, the statement asserts a definitively positive outcome. In the context of a big increase in debt, the typical concern is crowding out private investment or fiscal constraint, so “more investments” is not a reliable negative effect and is generally not considered a guaranteed consequence.

In summary, option c describes a plausible and commonly cited negative effect—future fiscal tightening through higher taxes or reduced spending—whereas the other options either describe potential benefits or rely on conditions that do not consistently produce a negative outcome.

What is a possible negative effect of a big increase in government debt?

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