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

Question

Responses

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.

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.

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

Answer 1

The most likely consequence 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 meet its debt obligations, demand for government securities may decrease. To attract buyers, the government would likely need to raise interest rates on new debt issuances, which in turn would increase the overall cost of borrowing for the federal government. This scenario could lead to a vicious cycle of increasing debt levels and rising interest rates.