A high and rising level of long-term debt relative to short-term debt might signify that:

A high and rising level of long-term debt relative to short-term debt might signify that: (a) inflation expectations are worsening; (b) monetary policy is too tight; (c) borrowers have confidence in the outlook for inflation and real economic growth; (d) major debt restructuring is imminent.

Expert Solution

Long -term debt refers to those debts which have maturities more than one year and short-term debt refers to those debts with maturities less than a year.

Here, option (a) is the correct answer. The given statement says that the long-term debts are costlier than the short-term debts.

· In the option (a), it is said that the inflation expectations are worsening. This means that the economy would be expecting a recession in the long run. Thus, if long-term debts are provided, it would mean that the company has a more chance of getting defaulted due to the recession that may occur in the near future as the inflation expectations are falling. This would result in making the long-term debts costlier than the short-term debts.

· In option (b), a tighter monetary policy means a contractionary policy which would result in reducing the flow of money in the market. This means that less money is now made available to the economy for spending which would make short-term debts costlier than the long-term debts. Hence this statement is false.

· In option (c ), it is given that the borrowers have confidence in the inflation levels and the economic growth. This means that in the long term, the borrowers would be able to pay back the debt which would make long term debts less costly. Hence this statement is faslse

· Option (d) states about Debt restructuring. It is a process where the financial institutions are provided credit, especially in the longer term in order to overcome the failures they have faced. This means that long-term loans have to be provided to make proper restructuring plans. Thus, in such a case, long-term debts have to be less costly. Hence, this statement is also not true.

Rahul Sunny answered 2 years ago

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