If the federal government fails to control the growth of its debt and the debt grows larger and larger as a share of the economy,which of the following is most likely to happen?

Question

Quizplus · Accepted Answer

If the government repays bondholders with newly created money, it will lead to inflation as the supply of money will increase but the supply of goods and services will remain the same. As a result, people will have more money to spend, but the purchasing power of each dollar will decrease, causing a rise in the price level. This scenario is known as "inflationary finance." Option A is less likely as it would cause a severe economic crisis and damage the government's credibility in the financial markets. Option B is also unlikely as a growing debt can signal higher risk, leading lenders to demand higher interest rates. Option D is also incorrect as an expansionary monetary policy may lead to short-term economic growth, but the inflationary consequences could shorten the long-term benefits.

If the Federal Government Fails to Control the Growth of Its