Question

Public debt becomes unsustainable when

• A. Interest rate \(>\) Growth rate
• B. Growth rate \(>\) Interest rate
• C. Expenditure falls
• D. Taxes rise

Hint:

Public debt becomes risky when the interest rate on debt is greater than the growth rate of the economy.

Answer 1

The Correct Option is A

Concept: Public debt sustainability depends on the relationship between the interest rate on debt and the growth rate of the economy.

Step 1: Understand public debt.
Public debt is the borrowing of the government. The government has to pay interest on this debt. \[ \text{Public Debt} \Rightarrow \text{Interest payment burden} \]

Step 2: Understand the growth rate.
The growth rate shows how fast the economy and national income are increasing. If the economy grows fast, it becomes easier to repay debt.

Step 3: Compare interest rate and growth rate.
If the interest rate is higher than the growth rate, debt grows faster than the economy. \[ r>g \] where, \[ r=\text{Interest rate} \] and \[ g=\text{Growth rate} \]

Step 4: Conclusion.
When \(r>g\), public debt may become unsustainable because the repayment burden increases faster than income. Therefore, the correct answer is option (A).