When a government has a budget deficit, it must issue (sell) government bonds to finance the deficit. Does it matter for the rate of inflation if the government sells the government bonds to the public or sells the government bonds to the central bank?
Explain why it does or does not matter.
What will be an ideal response?
It matters greatly. When the government sells the bonds to the public the money supply does not change, but when they sell the bonds to the central bank the money supply increases. If there are large budget deficits, the money supply will increase substantially when the central bank buys government bonds. Using the quantity theory of money, the increase in money supply from the purchase of the bonds by the central bank will increase the inflation rate.
You might also like to view...
Total expenditure equals
A) C + I + G + NX. B) C + I + G - NX. C) C + I - G + NX. D) C - I + G + NX. E) C - I - G - NX.
Other things equal, if the Fed increases the discount rate,
A) the monetary base will decrease and the money supply will remain constant. B) the monetary base and the money supply will both decrease. C) the money supply will decrease and the monetary base will remain constant. D) the monetary base will decrease and the money supply may increase or remain constant.
The country of Yipi can raise its productivity by investing more in
a. both human and physical capital b. human capital only c. physical capital only d. stable foreign economies e. stocks and bonds
Externalities affect only the buyer and seller involved in an exchange
a. True b. False Indicate whether the statement is true or false