Final answer:
Accepting partial payment of a debt can lower the value of the loan to investors, much like how the perception of a nation's growing public debt could reduce foreign investment, affect the supply of financial capital, and change the equilibrium price and quantity for capital in financial markets.
Step-by-step explanation:
The effect of accepting partial payment of debt involves several considerations. For a borrower consistently late on loan payments, the perception of their ability to repay the loan fully and on time diminishes.
This perception could reduce the value of the loan to potential investors, as such a loan becomes less attractive compared to other investments.
When discussing debt within the context of a nation, such as during the Washington administration, similar principles apply.
Debts held by a nation, whether foreign or domestic, affect investor confidence. For instance, with the growth of the U.S. public debt, foreign investors might view the U.S. economy as less desirable for investment. This diminished confidence impacts the supply of financial capital,
which can lead to higher interest rates and a competition for financial resources between the government and private businesses. The equilibrium price and quantity for capital in financial markets would likely be affected, with an increase in public debt potentially raising the cost of borrowing.