3. Explain how a policy of fiscal austerity can make it more likely that a government is unable to pay its debts.
Fiscal austerity is the same as a contractionary fiscal policy. It reduces government spending, which in turn reduces income and reduces tax revenue. With less tax revenue, the government is less able to pay its debts. Also, a failing economy causes lenders to have less confidence that a government is able to pay its debts and leads them to raise interest rates on the debt. Higher interest rates on the debt make it even less likely the government can repay.