{"id":1270,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1270"},"modified":"2025-04-18T10:45:31","modified_gmt":"2025-04-18T10:45:31","slug":"size-national-debt-relative-gdp","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/","title":{"rendered":"Size of a National Debt Relative to GDP"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Monetary and Fiscal Policy (2022 Level I CFA\u00ae Exam \u2013 Reading 12)\",\n  \"description\": \"This video lesson covers monetary and fiscal policy for CFA Level 1, including the roles of central banks, the money creation process, the Fisher effect, tools of monetary policy, and fiscal implementation challenges. It also explains how these policies interact to influence growth, inflation, interest rates, debt, and economic stability.\",\n  \"uploadDate\": \"2018-11-12T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/KKHi1HKTpD4\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=KKHi1HKTpD4\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/KKHi1HKTpD4\",\n  \"duration\": \"PT29M18S\"\n}\n<\/script>\n\n\n\n<h2>[vsw id=&#8221;KKHi1HKTpD4&#8243; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/h2>\n<p>The national debt is the total amount of money owed by the central government. It is important for a country to grow its economy and, at the same time, reduce its national debt. Many believe that government debt can cause great political instability. To some degree, this could be true because it may cause:<\/p>\n<p><!--more--><\/p>\n<ul>\n<li>a loss of confidence by investors;<\/li>\n<li>reduced government spending; and<\/li>\n<li>the printing of currency, leading to inflation.<\/li>\n<\/ul>\n<p>However, this is usually not the case. High national debt does not necessarily cause instability. In fact, on the contrary, it may even prevent deeper economic depressions. Some economists argue that during a recession, government borrowing and spending can help prevent a collapse in demand and growth.<\/p>\n<p>In a recession, individuals tend to save more and they can therefore buy government debt denominated in their own currency. This allows the government to borrow at low prices to finance public sector expenditures.<\/p>\n<h4><strong>National debt matters depending on the following factors:<\/strong><\/h4>\n<ol>\n<li>the way it has been financed. For instance, depending on overseas borrowing can be risky because of currency rate risk;<\/li>\n<li>higher economic growth enables a country to be able to repay its debt. If a country is stuck in a recession, the debt will increase relative to the GDP;<\/li>\n<li>domestic investors are willing to buy government bonds. When a country has a large pool of domestic savings, its government will borrow cheaply; and<\/li>\n<li>there is a structural deficit, and the government is borrowing heavily in a period of growth.<\/li>\n<\/ol>\n<p>For a stable economy, the government needs a low and stable inflation rate and a sustainable economic debt.<\/p>\n<h3>Crowding Out<\/h3>\n<p>During recessions, the private sector borrows less but saves more. A more critical situation occurs when both the private sector and government debt grow simultaneously, as this will eventually result in crowding out. Crowding out can lead to a substantial rise in interest rates, which discourages businesses from making capital investments.<\/p>\n<h3>Asset Bubbles<\/h3>\n<p>A persistent lack of capital caused by consumption demand and speculative asset prices creates bubbles. The most likely outcome will be short-term economic growth and a long-term decline in growth, as seen from the housing bubble that took place before the 2007-2008 housing market collapse and subsequent recession.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which one of the following is <em>most likely<\/em> a disadvantage of national debt?<\/p>\n<p>A. A country acquires additional funds for growth<\/p>\n<p>B. National debt improves the standard of living<\/p>\n<p>C. National debt can cause inflation<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>When the government borrows too much, it causes problems by raising interests rates and consequently inflation.<\/p>\n<p>Options A and B are potential advantages of national debt.<\/p>\n<\/blockquote>\n<p><em>Reading 16 LOS 16q:<\/em><\/p>\n<p><em>Describe the arguments about whether the size of a national debt relative to GDP matters<\/em><\/p>\n<div class=\"notes_inv\">\n<hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;KKHi1HKTpD4&#8243; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] The national debt is the total amount of money owed by the central government. It is important for a country to grow its economy and, at the same time, reduce its national debt. Many&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1270","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>National Debt Size Relative to GDP | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"National Debt Size Relative to GDP | CFA Level 1\" \/>\n<meta property=\"og:description\" content=\"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-12T13:33:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-04-18T10:45:31+00:00\" \/>\n<meta name=\"author\" content=\"Brian Masibo\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Brian Masibo\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\"},\"author\":{\"name\":\"Brian Masibo\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183\"},\"headline\":\"Size of a National Debt Relative to GDP\",\"datePublished\":\"2019-09-12T13:33:00+00:00\",\"dateModified\":\"2025-04-18T10:45:31+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\"},\"wordCount\":478,\"articleSection\":[\"Economics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\",\"name\":\"National Debt Size Relative to GDP | CFA Level 1\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-09-12T13:33:00+00:00\",\"dateModified\":\"2025-04-18T10:45:31+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183\"},\"description\":\"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Size of a National Debt Relative to GDP\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183\",\"name\":\"Brian Masibo\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/stefan-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/stefan-150x150.png\",\"caption\":\"Brian Masibo\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/brian-masibo\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"National Debt Size Relative to GDP | CFA Level 1","description":"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/","og_locale":"en_US","og_type":"article","og_title":"National Debt Size Relative to GDP | CFA Level 1","og_description":"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-09-12T13:33:00+00:00","article_modified_time":"2025-04-18T10:45:31+00:00","author":"Brian Masibo","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Brian Masibo","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/"},"author":{"name":"Brian Masibo","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183"},"headline":"Size of a National Debt Relative to GDP","datePublished":"2019-09-12T13:33:00+00:00","dateModified":"2025-04-18T10:45:31+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/"},"wordCount":478,"articleSection":["Economics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/","name":"National Debt Size Relative to GDP | CFA Level 1","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-09-12T13:33:00+00:00","dateModified":"2025-04-18T10:45:31+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183"},"description":"Understand the significance of national debt relative to GDP, key arguments on its impact, and reasons why debt levels matter in economic policy.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/size-national-debt-relative-gdp\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Size of a National Debt Relative to GDP"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/224cadd695f477a293f18471cf4e4183","name":"Brian Masibo","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/stefan-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/stefan-150x150.png","caption":"Brian Masibo"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/brian-masibo\/"}]}},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1270","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=1270"}],"version-history":[{"count":30,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1270\/revisions"}],"predecessor-version":[{"id":55957,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1270\/revisions\/55957"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=1270"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=1270"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=1270"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}