The government of Happyland collects $100 million in taxes each year, and curren

Question

The government of Happyland collects $100 million in taxes each year, and currently has a public debt of $1.2 billion, which it finances by issuing Treasury bonds that pay 8% per year. Is this a manageable level of debt for the government of Happyland? a) Yes, the debt is manageable because an interest rate of 8% is relatively low. b) Yes, the debt manageable because the public debt is only 12 times the size of tax revenues. c) No, the debt is not manageable because interest payments equal $96 million per year. d) No, the debt is not manageable because the government must repay the entire $1.2 billion debt at the end of the year.

Explanation / Answer

c) No, the debt is not manageable because interest payments equal $96 million per year.

Annual interest payment for debt = 0.08*1.2B = $96 million

Only the interest payment is about 96% of government revenue, so its not manageable.

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