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(Solution document) The US public debt now stands at approximately $21 trillion, making the country the largest debtor nation in the world. Current US real GDP is...


The US public debt now stands at approximately $21 trillion, making the country the largest debtor nation in the

           world. Current US real GDP is approximately $19.5 trillion. One option for debt repayment is for the US Federal

          Reserve System [the US central bank] to create new money and then pay debt holders as needed.


[a]  What effect would pursuit of this option have on long run inflation in the US [i.e. increase, decrease, or no effect]?


     Hint: See pp. 238-241 in Chapter 11 of the course textbook.


[b] What effect would this option have on nominal interest rates in the US [i.e. increase, decrease, or no effect]? 


     Hint: See pp. 242-244 in the textbook.


[c]  What effect would pursuit of this option have on aggregate purchasing power in the US [i.e. increase, decrease, or no effect]? 


     Hint: See p. 245 in the textbook.

 







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