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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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