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Chapter 22: Q 31. (page 553)

If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bonds?

Short Answer

Expert verified

This is done by the government in order to protect itself from high rates of inflation.

Step by step solution

01

Step 1. Definition

Inflation is a situation in an economy when the average prices of all the goods and services increased because of some market pressures.

02

Step 2. Explanation

If a government gains from unexpected inflation when it borrows, it chooses to offer indexed bonds, and also if the government is generally benefitted from inflation, it also offers indexed bonds because the reason is the guarantee of interest rate in index bonds and because of inflation there is no change in interest rate of index bonds.

03

Step 3.

This interest rate on index bonds provides safety and upliftment to the investors of indexed bonds. Thus because of this government is actually protecting itself from offering inflation high rates.

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Most popular questions from this chapter

The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=拢940, year 2=拢970, year 3=拢1000, and year 4=拢1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.

Given the federal budget deficit in recent years, some economists have argued that by adjusting Social Security payments for inflation using the CPI, Social Security is overpaying recipients. What is their argument, and do you agree or disagree with it?

Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?

The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3%, what would likely happen to a homeowner with an adjustable-rate mortgage?
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