Question

14f) Fill in the blanks with the best possible answer listed

One way countries try to get out of debt is to Monetize their Debt. This Involves Increasing_________(Q, M, V, P) which Increases_________(Q, M, V, P). This effectively transfers wealth from the Citizens to the Government and also from_________(Debtors, Lenders) to_________(Debtors, Lenders).

In the long-term this hurts GDP growth as it decreases trust in the Government________(True, False). If you have a home loan or a car loan should you repay the loan quickly if you think Inflation is coming?___________(Yes, No). (Assuming you have no job concerns)

Answer 1

debt monetization occurs government gets money from central bank. when government face deficit budget it can raise money by creating new money. It happen via central bank. central bank purchases the government bonds and pays currency to government. Thus government get money which it cannot be repaid. Thus money supply increases.

As per Qunatity theory of money, whem money supply increases prices will also increase in same proportion. MV=PQ

M- money supply

P- price level

Q-output

V- velocity

While Q and V remains same , there is a direct and proportional relation between M and price. With debt monetisation money supply increases, as a result  price leve also increases.

When price increases , value of money decreases, THere is an inverse relation between price and value of money. During Inflation debtors benefits because with inflation value of money idecreases , thus debtors now need to pay less valued same amount of money. Also with increase in money supply interest rate decreases, debtors benefits and lenders loses.

with increase in money supply, inflation occurs. long run impact of deb monetization or increase in money supply is hard to identity. from the evidence it is understood that, when debt monetization, inflation occurs. Speculative activities occurs, which leads to wastage of resources. Thus production activities increases. In this longrun economy slides to recession, where output and employment decreases.

One way countries try to get out of debt is to Monetize their Debt. This Involves Increasing___M (money supply )______(Q, M, V, P) which Increases_______P (price level)__(Q, M, V, P). This effectively transfers wealth from the Citizens to the Government and also from__Lenders_______(Debtors, Lenders) to______Debtors___(Debtors, Lenders).

In the long-term this hurts GDP growth as it decreases trust in the Government____TRUE

__(True, False).

If you have a home loan or a car loan should you repay the loan quickly if you think Inflation is coming?____no_______(Yes, No). (Assuming you have no job concerns)

Because with inflation value of money declines. Now i need to pay less valued money with inflation price level increases. wages and salaries also increases, thus with increased salary old debt can be easily paid, because value of money has decreased.