National Debt and the Federal Budget Quick Check

Question

4 of 54 of 5 Items

Question
Predict the consequences of investors doubting the federal government's ability to repay the national debt.(1 point)
Responses

Investors would be selling their existing securities and buy new securities at lower interest rates, which lead to a decrease in available cash for the federal government.
Investors would be selling their existing securities and buy new securities at lower interest rates, which lead to a decrease in available cash for the federal government.

Fewer investors would be purchasing the securities from the Treasury, resulting in an increase in interest rates, and a further increase in the cost of borrowing for the national debt.
Fewer investors would be purchasing the securities from the Treasury, resulting in an increase in interest rates, and a further increase in the cost of borrowing for the national debt.

More investors would be purchasing the securities, resulting in a decrease in interest rates, which actually decreases the cost of borrowing for the national debt.
More investors would be purchasing the securities, resulting in a decrease in interest rates, which actually decreases the cost of borrowing for the national debt.

Investors would purchase new securities and try to sell their existing securities back to the government, resulting in a cash crunch.

Answer 1

The correct response to the question about the consequences of investors doubting the federal government's ability to repay the national debt would be:

Fewer investors would be purchasing the securities from the Treasury, resulting in an increase in interest rates, and a further increase in the cost of borrowing for the national debt.

When investors lose confidence in the government's ability to repay its debt, they may demand higher interest rates to compensate for the increased risk, leading to higher borrowing costs for the government.