How can government debt impact the economy?

Government debt can impact the economy significantly through various channels, one of which is fiscal sustainability. When a government accumulates large amounts of debt, it raises concerns about whether it will be able to meet its future obligations. This concern can affect investor confidence, leading to higher interest rates as lenders demand a premium for the perceived risk of default. Furthermore, if investors believe that debt levels are unsustainable, they may adjust their expectations regarding future taxes or government services, which can lead to reduced consumer and business spending.

This concern over fiscal sustainability can also influence macroeconomic policies. Governments facing high levels of debt may be more hesitant to implement expansionary fiscal policies, even in times of economic downturn, for fear of further increasing deficits and worsening debt levels. This can ultimately hinder economic growth.

The other choices do not capture the nuanced effects of government debt sufficiently. For example, the view that government debt does not affect economic growth overlooks how fiscal sustainability concerns can directly impact the economy. While there may be instances where government debt leads to lower interest rates, this relationship is not always straightforward, especially in the presence of investor skepticism regarding fiscal sustainability. Lastly, stating that it only affects consumer spending ignores the broader implications government debt has on overall economic health and the interaction between government