Lp 9 Assignment

* LP: 9 ASSIGNMENT * * * * Janice Talas * * * National American University * * * * * * * * * * * * * * * * * * * * * * * * * * We are assuming that a country’s real growth is 2 percent per year while its real deficit is rising 5 percent per year. I do not think a country can afford such deficits indefinitely simply because of the fact that borrowing will cause the interest rates to rise and remain high for an extended period of time. This increase of rates will devalue currency and lead to investment decrease causing the economy to go into a recession. * * If a country’s debt rises at the rate of 3 percent which is = 5% - 2%, it will rise. Actually it will double in 23.5 years which is ten times in 78 years. If this continues, the value of currency will decrease and will reduce. With the reduction of currency the country will not be able to make purchases from other counties. Exports and imports of goods and services may slow down considerably or even cease since the country’s currency is no longer of any value to others. A country with very high debt to growth domestic product (GDP) ratio will indicate that the government may not be able to repay a loan or make their interest payments on time which may cause the rating agencies to lower the rating of that specific country. A lower rating may possibly make it difficult for the government to raise the country’s debt as well as making the cost of borrowing higher because the investors may consider purchasing bonds a very risky investment and will expect a higher return on this investment. With the rise of interest rates, asset price decreasing and cutting off consumption may all result in a huge disruption of the stock market which will bring the country into a recession as well as cause a downward spiral of the value of the dollar which