Question

Discuss three purposes of public debt.

Discuss the purpose of public debt.

Answer 1

1. Bridging the gap between revenue and expenditure: The government occasionally runs out of finances. To close the revenue-to-expenditure imbalance, the government raises temporary loans or obtains "ways and means" credit from the Central Bank. The government of India publishes 'Treasury Bills,' which are repayable after three months.
2. Financing Public Work Programmes: During a depression, the government must initiate public work initiatives to offer employment. This injects money into the economy, lifting it out of the doldrums. To achieve this goal, public loans must be raised to ensure economic stability.
3. Gurbing inflation: When inflation is rampant and it is wanted to reduce prices, the government issues public loans. This method extracts money or purchasing power from the population. A reduction in the money supply will result in lower pricing.
   As a result, public debt serves a variety of purposes.

Answer 2

1. The government may borrow to cover the budgetary deficit.
2. The government may have to mobilise additional resources by means of public debt in times of crisis like war, natural calamities, etc.
3. The government may borrow and spend it to raise the level of aggregate demand during the period of depression.