What are the origins of cyclical and structural debt?

Expert Solution

Cyclical debts are the debts issued due to the change in economic scenario on a short term basis. It depends upon the economy going through stages of a business cycle. So, the origin of the cyclical debts are as follows:

1. Increase in unemployment benefits, causes government to go for the debt financing and generate funds.

2. Slowdown in the tax revenue due to the recessionary impact of the business cycle.

3. Funding for the transfer payment made by the government

4. Debt financing opted by the firms when the economy starts recovering

Structural debts are the long term debts that are taken irrespective of the economic scenario in the economy. Sources of structural debt are as follows:

1. Discretionary spending by the government that requires the government to opt for issuing bonds or debt certificates to the investors

2. Spending upon the development projects

3. Deficit financing by the government

Rahul Sunny answered 1 year ago

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