If a country with a large government debt uses money creation to service and repay the debt, this will lead to
A) lower interest rates.
B) an appreciation of the nation's currency in the foreign exchange market.
C) inflation, higher interest rates, and a financial crisis.
D) rapid economic growth, as the expansionary monetary policy stimulates the economy and generates the additional tax revenue to service the larger debt.

Question

Quizplus · Accepted Answer

When a country with large government debt uses money creation to service and repay the debt, this leads to inflation as there is an increase in the money supply. This results in higher interest rates as lenders demand higher rates to compensate for inflation. Eventually, this can lead to a financial crisis in the long run. Choice A is incorrect as lower interest rates are unlikely to occur due to the inflationary pressures. Choice B is incorrect as the increased money supply in the economy would result in a devaluation of the currency rather than an appreciation. Choice D is also incorrect as although the expansionary monetary policy may stimulate the economy in the short run, the inflationary pressures and higher interest rates would eventually outweigh any benefits.

If a Country with a Large Government Debt Uses Money