CFA Level I · CFA Level I Exam · Fiscal Policy
Which factor would most likely make a given level of government debt harder to sustain?
A rising share of foreign-currency debt makes debt harder to sustain. Currency depreciation raises the local-currency burden of interest and principal, and the government cannot print foreign currency. Low interest rates versus growth and domestic ownership generally make debt easier to carry.
- AInterest rate on the debt falling below nominal growth
- BA larger share of the debt owed to domestic residents
- CA rising share of debt denominated in foreign currencyCorrect
Explanation
Foreign-currency debt exposes the government to depreciation, which raises the domestic cost of servicing and repaying it, and the government cannot create that currency. A low interest rate relative to growth and domestic ownership both ease sustainability.
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