With regard to the subject matter of American economic history, ...

[wenmo]

With regard to the subject matter of American economic history, Hughes and Cain (2011) suggest that
 
  (a) the presence of the highest living standards known in world history supports the claim that American history is largely a success story.
  (b) the American economy is an economy with only successes but no failures.
  (c) U.S. history provides a fragmented record of problem-solving and problem-producing
  solutions to the challenges of economic development.
  (d) there is no link between today's economy and the economy of yesteryear.

Question 2

A default in the past makes it much more likely that a government will default again, even if the current government is a new regime with every intention of honoring its debts. Why might that be?
 
  What will be an ideal response?

[bigcheese9]

Answer to Question 1

(a)

Answer to Question 2

Given the history of default, the government will be able to borrow at all only by paying a relatively high interest rate. Willingness to bear a high cost of borrowing implies that the government feels compelled to spend more than the revenues it can raise. The willingness of creditors to buy the debt implies optimism about future growth and ability to avoid default. A negative macroeconomic shock will both reduce revenue and necessitate increased spending to counteract the economic decline. Tax rates cannot be increased without causing distortions that weaken the economy even further. If creditors are willing to finance more debt, the budget becomes more fragile. If (when) new credit is not available, the government has neither means nor incentive to honor the existing debts.

[wenmo]

Correct answers!

[bigcheese9]

Great! Please up vote