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 debt.
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

Inflation reduces the real value of money, which means that the nominal value of debt remains constant while the real value of debt decreases. This has the effect of reducing the burden of debt on the government. However, since the government budget is reported in nominal terms, the inflation rate must be taken into account when calculating the budget deficit. Therefore, the reported government budget will show a deficit equal to the inflation rate times the outstanding debt.

In a Time of Inflation When the Real (I