Reference no: EM131879010

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.