Suppose you are the president of a country whose government debt-to-GDP ratio is exploding, and you want to stabilize this ratio. One of your economic advisers (not a graduate of UPSE) tells you to "monetize debt." According to your adviser, this will save the interest payment on debt, since the government will pay zero percent on the monetary base that will be created from the rise in money supply. You should fire your adviser, because: O a. this is equivalent to defaulting on the government debt which only postpones the repayment of debt to a later period. O b. the adviser confused seigniorage with inflation tax which is why his recommended policy would fail. GDP will fall, too. while this might help to stabilize the debt-to- GDP ratio, but it will result in exploding inflation. O c. O d.

Suppose you are the president of a country whose government debt-to-GDP ratio is exploding, and you want to stabilize this ratio. One of your economic advisers (not a graduate of UPSE) tells you to "monetize debt." According to your adviser, this will save the interest payment on debt, since the government will pay zero percent on the monetary base that will be created from the rise in money supply. You should fire your adviser, because: O a. this is equivalent to defaulting on the government debt which only postpones the repayment of debt to a later period. O b. the adviser confused seigniorage with inflation tax which is why his recommended policy would fail. GDP will fall, too. while this might help to stabilize the debt-to- GDP ratio, but it will result in exploding inflation. O c. O d.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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