Question

Suppose a country is projecting a deficit of $20 million next year. Which of the following events would add most to the debt?

an increase in the deficit of $500,000

a 3% rise in the interest rate

an increase in tax revenues of $600,000

all of the above would increase the debt by the same amount

Answer 1

A 3% rise in the interest rate

A 3% increase in the interest rate would add $600,000 to the deficit and thus to the debt. This exceeds a $500,000 increase in the deficit, while tax revenues would decrease, not increase, the debt.