Question

does it make any difference whether the federal debt is financed by domestic citizens or foreigners?no, because interest payments on both foreign and domestic borrowing will be received by foreigners.yes, because foreign borrowing will influence future generations primarily through its impact on capital formation, whereas domestic borrowing will not.no, because interest payments on both foreign and domestic borrowing will be received by u.s. residents.yes, because interest payments on foreign borrowing will be received by foreigners, whereas interest payment on domestic borrowing will be received by u.s. residents.

Answer 1

It does make a difference if U.S. federal debt is financed by foreigners or domestic citizens as foreign financing can lead to a loss of U.S. purchasing power and influence interest rates and capital formation differently than domestic financing.

Step-by-step explanation:

The question concerns whether it matters if the United States federal debt is financed by domestic citizens or foreigners. It does indeed make a difference. When foreigners buy U.S. federal debt, the interest payments are made to entities outside the U.S., thereby transferring wealth from the U.S. to other countries.

This can be seen as a loss of purchasing power for the U.S. economy. In contrast, when the debt is financed domestically, the interest payments stay within the U.S. economy, which can then be reinvested internally, encouraging capital formation.

Moreover, foreign investment in U.S. federal debt can influence financial capital availability, potentially raising the interest rates for businesses competing with the government for financial resources. This can affect economic growth by changing the levels of investment in human and physical capital within the country.