Economics [4 marks Question-Answer]

(i) (a)Public loans raised within the country are called internal debt whereas loans from other countries are referred to as external debt.
(b) An internal debt may be voluntary or compulsory whereas external debt is generally voluntary.
(ii) Loans taken by the government for developmental work is called productive debt. For example, loans used for construction of irrigation projects.
When the government borrows for non-developmental works (such as war finance) it is called unproductive loan.

Public debt means loans raised by the government within or outside the country.
Four types of Public Debt :
(1) Productive Debts : Productive debts are those debts which are used by the government for those projects which yield income e.g. loans used for the construction of power projects.
(2) Unproductive Debts : Public debts taken for unproductive purpose, for example loans taken by the government to finance budget deficit or war are unproductive debts.
(3) Redeemable Debts : Debts which are repayable by the government after a fixed period of time are called redeemable debts. Interest on such loan is paid regularly.
(4) Irredeemable Debts : Irredeemable debts refer to those debts whose principal amount is not refunded by the government. Only interest is paid regularly on such loans.

Difference between Funded Debt and Unfunded Debt :
(i) Funded debts are long term debts whose payments are made at least after a year or may not be made at all. In order to repay the debt, a debt fund is created in which some money is deposited every year by the government. The debt is repaid out of their fund on maturity.
(ii) Unfunded debts are for a short period of less than a year. The government does not create any separate fund to repay the debt. Treasury bills are examples of unfunded debts
Purpose of Public Debt
(i) The government may borrow to cover budgetary deficit.
(ii) The government may have to mobilise additional resources by means of public debt in times of crisis like war, natural calamities etc.
(iii) The government may borrow to spend it to raise the level of aggregate demand during the period of depression.