Question

In: Economics

) What would happen if we as a society stopped obtaining debt? 2) How does debt...

) What would happen if we as a society stopped obtaining debt?

2) How does debt continue to influence our economy?

3) Is there such a thing as "good debt"?

Solutions

Expert Solution

1. If there is a fully backed money and people save the prices of goods will go down as there will be surplus goods in the economy. The value of money will Increase and the savers wealth also will increase over a period of time. If people only save whatever they earn and only spend that then there will be no credit required at all. It would be a big change for the entrepreneurs capitalising new businesses since everyone would only spend what they earn, instead of having the option of taking a loan. This would create an issue for the economy as a whole. Many jobs would be lost and there would be ultimately a problem of recession.

2. Debt affects the flow of money in an economy which leads to price rise and then inflation. Increased debt reduces the standard of living of the people directly or indirectly. It results in a decrease in the per capita income as well. The taxes increase and thus it reduces the savings as a whole. Increase in debt also reduces the exports and increases the imports in an economy.

3. There certainly is an argument to be made that no debt is good debt, but borrowing money and taking on debt is the only way many people can afford to purchase big-ticket items like homes and cars. While such loans usually are justifiable and bring value to the person taking on the debt, there is another end of the spectrum that involves taking on debt through careless spending on a credit card.If the debt you take on helps you to generate income and increase your net worth, that can be considered positive and good debt.

For example debt taken for technical or college degree, Small business ownership, mortgage, etc


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