Question

Explain how the bankruptcy and borrowing powers work.

a) The government can declare bankruptcy to clear debts.

b) Borrowing powers allow the government to take loans for financial stability.

c) Bankruptcy is a tool to avoid debt, and borrowing powers are seldom used.

d) Borrowing powers are unlimited, leading to potential financial risks.

Answer 1

Bankruptcy and borrowing powers are two mechanisms that governments use to manage their finances. Bankruptcy is a legal process that allows individuals or entities to eliminate or reorganize their debts, while borrowing powers allow governments to secure loans by selling Treasury bonds, notes, and bills.

Step-by-step explanation:

The bankruptcy and borrowing powers are two mechanisms that allow governments to manage their finances.

Bankruptcy is a legal process that allows individuals or entities to eliminate or reorganize their debts when they are unable to pay them. However, governments do not declare bankruptcy to clear debts like individuals do. Instead, they use borrowing powers to secure loans and manage their financial obligations.

Borrowing powers allow governments to borrow funds by selling Treasury bonds, notes, and bills. These funds can be used to pay down the national debt or be used for various government programs and services. However, large and sustained borrowing can have negative consequences such as reducing the financial capital available to private sector firms and leading to trade imbalances and financial crises.