Question

How does treasury debt held by foreigners decrease economic growth? A.) Foreigners pay capital gains tax on U.S. held securities to the U.S. government. B.) Interest payments to foreigners comes from U.S. tax revenues. C.) Net exports decline as a result of foreign held debt. D.) Foreign nations do not charge interest on loans

Answer 1

It shall be noted that treasury debt is held by Foreigners.

If Foreigners pay capital gains tax on the U.S. held securities to the U.S. government, it means tax collection by the US government would increase. This will not adversely affect economic growth.

It is not correct to state that Foreign nations do not charge interest on loans. They do charge interest on loans.

Interest payments to foreigners come from U.S. tax revenues. The interest payments are a small fraction of total government expenditure. Thus, its implication on economic growth would be marginal.

Hence, the correct answer is Net exports decline as a result of foreign-held debt.

With the decline in net exports, the aggregate demand of the economy's final goods & services fell steeply thereby causing the fall in economic growth.

Hence, the correct answer is C.) Net exports decline as a result of foreign held debt.