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A. Because debt service is the difference between the passive and structural deficits. The bigger the difference between the two, the greater the burden of the debt on the economy.
B. Because interest payments are the result of past expenditures and do not result in additional productive expenditures. They are the burden of the debt: if the debt service is large and is hurting the government’s ability to fund today’s expenditures, that debt could be considered a problem.
C. Because debt service determines the real deficit. The higher the real deficit, the greater the burden of the debt on the economy.
D. Debt service is not an important measure of whether debt is a problem. Only debt/GDP ratios and future budget balance projections are relevant measures of the burden of the debt on the economy.

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It is for debt in infrastructure.

4 Thoughts on HELP ASAP: Why is debt service an important measure of whether debt is a problem?
  1. Reply
    Harley Drive
    July 16, 2011 at 3:12 am

    depends if the debt is for investment in infrastructure or to finance wars and social spending

  2. Reply
    July 16, 2011 at 3:58 am

    The answer is D. It is said that the US economy is safe if the debt/GDP is under 90. Debt service is cash required over a given period for the repayment of interest and principal of debt. Economist prefers debt service ratio to measure international finance. It’s the ratio of debt service payments of a country to that country’s export earning. But the debt/GDP will be a measure of the economy.It needs a projection of budget deficits, the revenue from taxes and the spending.

  3. Reply
    July 16, 2011 at 4:17 am

    The answer is B. Interest payments are the result of previous “sunk costs” — they relate entirely to past expenditures and limit the ability to solve present problems.

  4. Reply
    I didn't do it!
    July 16, 2011 at 4:35 am

    The correct answer is D. The reason is that as long as the growth rate of GDP is higher than the interest rate on the debt of the previous period, the debt service (interest payable on the current debt level) is not a problem.

    Assume that the interest payments due in the current period are added to the debt of the previous period. This is calculated as the interest rate r times the total debt. Assume further that in the same period the GDP has grown by a factor g. If g > r, then the ratio of Debt / GDP actually gets smaller.

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