In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally:
A)reported government budget will show a deficit equal to the inflation rate times the outstanding debt.
B)reported government budget will show a deficit equal to less than the inflation rate times the outstanding
C)reported government budget will be balanced.
D)measured government budget will show a surplus equal to the inflation rate times the outstanding debt.

Question

Quizplus · Accepted Answer

In a time of inflation, the nominal value of the government debt will rise due to the general increase in prices. However, the real value (i.e., adjusted for inflation) of the debt remains constant. As a result, the interest payments on the debt will rise, which will increase the reported deficit. The size of the deficit will be equal to the inflation rate times the outstanding debt. Therefore, choice A is the correct answer.

In a Time of Inflation When the Real (I