Question

The national debt has recently exceeded $21 trillion. Based on the information you have learned in this module, write an essay explaining why and how increasing the money supply to pay down this large debt would lead to significant inflation.Your essay should be approximately 1 page.

Answer 1

Debt monetization is the process of creating money by using debt instruments. It is the creation of new reserves in the banking system that increases the money supply in the economy. It generally by the Treasury sells the bonds to the federal reserves. It is equivalent to printing a new currency in the market. The debt monetization will lead to an increase in the money supply that would result from reducing the interest cost of the debt. That means the publicly available debt will reduce and debt held by the federal reserve would rise. That is the interest paid by the fed will return to the treasury. The effort to pay the debt by using this method by several years leads to an increase in the money supply in the economy. That causes hyperinflation and reduce the value of the domestic currency. The debt pay by using the domestic currency would harm the economy because of depreciation.

When the government prints new money to the economy results to increase the money supply and then raises the prices and lead to inflation. The effects of these people increase hoarding activity. Due to the hyperinflation, people hoard automobiles and washing machines. When it goes longer, they also hoard perishable goods. Then the supply will fall, and prices would rise more. The cost of import also rise and they out from the business. Moreover, unemployment also rises, and tax revenue falls.