Question

Upload your individual response of 2-3 paragraphs (about 1 page) to the following questions. Your response will clearly involve some amount of opinion, but do your best at thinking through and analyzing the questions fully before writing your answer. Carefully organize your writing before uploading your response, and any information from outside sources must be cited appropriately using MLA style. Please be sure you save your assignment as .rtf, .docx, .doc in order to upload. See the attached rubric for how you will be graded on this assignment.

Instructions/Questions

Before addressing the following questions, you will first need to collect some data! Use online websites (such as Wikipedia) to find economic data for Japan, USA, India, Italy, Iraq, and Mexico. Specifically, find recent data for per capita GDP and government debt-to-GDP ratio.

1. Based on the data collected, do you think that debt is a problem faced by economically advanced countries, undeveloped countries, or both? Justify your answer.

2. The United States government has a 100% repayment rate—it has always repaid its debt. Given what we know about risk and return, do you think the USA is generally charged high or low interest rates on borrowing money? Similarly, do you think Iraq (a poor and economically unstable country) is likely to pay high or low interest rates on loans?

3. Explain the concept of “crowding out”. Based on the data collected, which of these countries likely has the most extensive “crowding out”? Explain.

Answer 1

1. The data is given below

The problem of high debt to gdp ratio seems to be a bigger problem in developed countries. This can be seen in the data, where underdeveloped countries such as India, Iraq and Mexico have debt to GDP ratios lower than 100%. At the same time, advanced countries such as US, Italy and Japan all have debt to GDP ratio higher than 100%.

2. Given its track record, US is likely to face much lower interest rates. Lower the risk, lower the interest rate required. On the opposite hand, Iraq will face a much higher interest rate as it carries much higher risk.

3. Crowding out effect is the result of private spending getting lower because of increased government spending. As government spending increases, the government borrows more money from the market. As government borrows more, private investors have to compete and are forced to give higher and higher interest rates to get money. This, essentially, results in lower privavte investments- crowding out.

We can conclude that the higher the governmental borrowing, the higher the crowding out. Hence, from the given data, Japan will have highest crowding out. Then Italy will have highest crowding out.