QUESTION 59 (4 marks)
A government refinances a $40 billion debt parcel. Its annual interest rate rises from 3% to 5%. Calculate the additional annual interest bill, assuming no principal repayment. Explain one opportunity cost for economic management.
Practice marking scheme
Answer
The annual interest bill rises by $0.8 billion.
Working
Initial interest = 40 × 0.03 = $1.2 billion; new interest = 40 × 0.05 = $2 billion. The additional $0.8 billion must be funded by revenue, further borrowing or reallocating spending. An opportunity cost could be the best alternative training or infrastructure expenditure forgone. The calculation applies only to this refinanced parcel, not every government debt instrument.
Marking criteria
- Calculates both interest amounts and the $0.8 billion increase. [2 marks]
- Explains a relevant fiscal opportunity cost with an example. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.