Types of Public Debt: Domestic and External

Description: This quiz aims to assess your understanding of the different types of public debt, namely domestic and external debt, and their implications for a country's economy.
Number of Questions: 15
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Tags: public debt domestic debt external debt government borrowing economic implications
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What is the primary source of domestic debt for a government?

  1. Borrowing from foreign banks

  2. Issuing treasury bills and bonds to domestic investors

  3. Printing new currency

  4. Raising taxes


Correct Option: B
Explanation:

Domestic debt is primarily raised by a government through the issuance of treasury bills and bonds to domestic investors, such as banks, financial institutions, and individuals.

Which of the following is NOT a type of domestic debt?

  1. Treasury bills

  2. Treasury bonds

  3. Municipal bonds

  4. Eurobonds


Correct Option: D
Explanation:

Eurobonds are a type of external debt, as they are issued by a government or corporation in a currency other than its own and are sold to investors outside its domestic market.

What is the main advantage of domestic debt over external debt for a government?

  1. Lower interest rates

  2. Reduced risk of default

  3. Increased foreign investment

  4. Enhanced economic growth


Correct Option: A
Explanation:

Domestic debt typically carries lower interest rates compared to external debt, as it is perceived as less risky by domestic investors.

Which of the following is a potential disadvantage of domestic debt for a government?

  1. Increased risk of inflation

  2. Reduced foreign exchange reserves

  3. Limited access to international capital markets

  4. Higher borrowing costs


Correct Option: A
Explanation:

Excessive domestic borrowing can lead to an increase in the money supply, potentially resulting in higher inflation.

What is the primary source of external debt for a government?

  1. Borrowing from domestic banks

  2. Issuing treasury bills and bonds to foreign investors

  3. Printing new currency

  4. Raising taxes


Correct Option: B
Explanation:

External debt is primarily raised by a government through the issuance of treasury bills and bonds to foreign investors, such as banks, financial institutions, and individuals.

Which of the following is NOT a type of external debt?

  1. Treasury bills

  2. Treasury bonds

  3. Eurobonds

  4. Municipal bonds


Correct Option: D
Explanation:

Municipal bonds are a type of domestic debt, as they are issued by local governments to finance infrastructure projects and other local expenditures.

What is the main advantage of external debt over domestic debt for a government?

  1. Lower interest rates

  2. Increased foreign investment

  3. Enhanced economic growth

  4. Reduced risk of default


Correct Option: B
Explanation:

External debt can attract foreign investment and help finance a country's development projects, potentially leading to increased economic growth.

Which of the following is a potential disadvantage of external debt for a government?

  1. Increased risk of default

  2. Reduced foreign exchange reserves

  3. Limited access to international capital markets

  4. Higher borrowing costs


Correct Option: A
Explanation:

Excessive external borrowing can increase a country's debt burden and raise the risk of default, especially during periods of economic downturn or financial crisis.

Which type of debt is generally considered to be more sustainable in the long run?

  1. Domestic debt

  2. External debt

  3. Both are equally sustainable

  4. Neither is sustainable


Correct Option: A
Explanation:

Domestic debt is generally considered to be more sustainable in the long run, as it is less exposed to fluctuations in foreign exchange rates and is less likely to be affected by external economic shocks.

What is the primary objective of public debt management?

  1. Minimizing the cost of borrowing

  2. Ensuring debt sustainability

  3. Maximizing foreign investment

  4. Promoting economic growth


Correct Option: B
Explanation:

The primary objective of public debt management is to ensure that a government's debt burden remains sustainable, while also meeting its financing needs and minimizing the cost of borrowing.

Which of the following is NOT a tool used in public debt management?

  1. Debt restructuring

  2. Issuance of new debt instruments

  3. Buybacks of existing debt

  4. Printing new currency


Correct Option: D
Explanation:

Printing new currency is not a tool used in public debt management, as it can lead to inflation and undermine the value of the domestic currency.

What is the main purpose of issuing treasury bills?

  1. To finance long-term government projects

  2. To raise funds for immediate government expenditures

  3. To attract foreign investment

  4. To reduce the budget deficit


Correct Option: B
Explanation:

Treasury bills are short-term debt instruments issued by a government to raise funds for immediate government expenditures, such as salaries, pensions, and other current expenses.

Which of the following is NOT a type of treasury bond?

  1. Fixed-rate bonds

  2. Floating-rate bonds

  3. Zero-coupon bonds

  4. Municipal bonds


Correct Option: D
Explanation:

Municipal bonds are issued by local governments, not by the central government. Fixed-rate bonds, floating-rate bonds, and zero-coupon bonds are all types of treasury bonds.

What is the main purpose of issuing Eurobonds?

  1. To finance domestic government projects

  2. To raise funds for immediate government expenditures

  3. To attract foreign investment

  4. To reduce the budget deficit


Correct Option: C
Explanation:

Eurobonds are issued by a government or corporation in a currency other than its own and are sold to investors outside its domestic market. The primary purpose of issuing Eurobonds is to attract foreign investment and diversify the government's funding sources.

Which of the following is NOT a potential consequence of excessive public debt?

  1. Increased risk of inflation

  2. Reduced economic growth

  3. Increased foreign investment

  4. Higher borrowing costs


Correct Option: C
Explanation:

Increased foreign investment is not a potential consequence of excessive public debt. Excessive public debt can lead to higher borrowing costs, increased risk of inflation, and reduced economic growth.

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