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Chapter 22: Q 31. (page 553)

If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bonds?

Short Answer

Expert verified

This is done by the government in order to protect itself from high rates of inflation.

Step by step solution

01

Step 1. Definition

Inflation is a situation in an economy when the average prices of all the goods and services increased because of some market pressures.

02

Step 2. Explanation

If a government gains from unexpected inflation when it borrows, it chooses to offer indexed bonds, and also if the government is generally benefitted from inflation, it also offers indexed bonds because the reason is the guarantee of interest rate in index bonds and because of inflation there is no change in interest rate of index bonds.

03

Step 3.

This interest rate on index bonds provides safety and upliftment to the investors of indexed bonds. Thus because of this government is actually protecting itself from offering inflation high rates.

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Most popular questions from this chapter

If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:

a. A union member with a COLA wage contract

b. Someone with a large stash of cash in a safe deposit box

c. A bank lending money at a fixed rate of interest

d. A person who is not due to receive a pay raise for another 11 months

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Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate than using the GDP deflator.

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