In a time of inflation when the government budget is balanced in the conventional sense, the real (i.e., deflated) value of the government debt is:
A) growing at the rate of inflation.
B) growing, but at a rate less than the rate of inflation.
C) constant.
D) decreasing at the rate of inflation.

Question

Quizplus · Accepted Answer

In a time of inflation, the real value of the government debt decreases at the rate of inflation. This is because the government debt is denominated in nominal terms and inflation reduces the purchasing power of money, thus reducing the real value of the debt. For example, if the government owes $100 with 10% inflation, the real value of the debt next year would be $90 in today's dollars. Therefore, the answer is D.

In a Time of Inflation When the Government Budget Is