Question

1. what happens if the u.s. national debt grows too large compared to gdp?

• inflation falls rapidly
• taxes are automatically cut
• national savings decline and interest rates rise
• government spending increases without limit

Explanation:

To solve this, we analyze each option:

• "Inflation falls rapidly": High debt relative to GDP typically doesn't cause rapid inflation fall; often, it can pressure inflation or interest rates, so this is incorrect.
• "Taxes are automatically cut": There's no automatic tax cut mechanism tied to debt - GDP ratio growth, so this is wrong.
• "National savings decline and interest rates rise": When national debt is too large relative to GDP, the government may need to borrow more. This increased borrowing can reduce national savings (as government borrowing competes for funds) and push interest rates up (due to higher demand for loanable funds), so this is correct.
• "Government spending increases without limit": High debt relative to GDP usually leads to constraints on government spending (e.g., due to investor confidence, debt servicing costs), not unlimited spending, so this is incorrect.

Answer:

C. National savings decline and interest rates rise