Which of the following explains how the cost of borrowing on the national debt would be affected if the federal government defaulted on its debts?

Question

A. The cost of borrowing would decrease because the demand for buying additional debt decreases.
B. The cost of borrowing would increase from investors demanding higher interest rates on the Treasury.
C. The cost of borrowing would decrease because a default results in lower interest rates for consumers and businesses.
D. The cost of borrowing would not be affected because a default restructures the payments with the lenders.

Answer 1

The correct answer is:

B. The cost of borrowing would increase from investors demanding higher interest rates on the Treasury.

If the federal government were to default on its debts, it would lead to a loss of confidence among investors. As a result, they would perceive higher risk in lending to the government, leading to higher interest rates demanded on new debt to compensate for that risk.