The $200 can be borrowed by selling government bonds to the public.
The public will earn interest on the bonds and the government will have to repay them.
$200 of new money is an alternative.
Money creation raises revenue.
We are able to understand how hyperinflations start.
Consider Hungary after World War II.
The war destroyed the country's economy and citizens demanded government services.
The government was limited in its ability to collect taxes because of the poor state of the economy, but it gave in to the demands of its citizens for spending that far exceeded what it could collect.
The result was a large deficit.
The country's economy was in such bad shape that the prospects for repayment in the near future were grim.
Hungary was unable to borrow so they printed money.
The result was inflation.
Zimbabwe experienced a devastating hyperinflation beginning in 2007.
To end hyperinflation, governments must eliminate their budget deficits by either increasing taxes or cutting spending.
There is no other remedy for the economic pain caused by this.
The hyperinflation will end once the deficit is cut and the government stops printing money.
Hyperinflation will die of starvation if money growth is not increased.
Money's role in all aspects of economic life is emphasized by economists.
Phillip Cagan, who is best known for his work on hyperinfla nominal income and inflation, is a student of Friedman's.
The link between money, nominal income, and inflation was pioneered by Friedman and Cagan.
In the 1960s, little attention was paid to the role of money in determining aggregate demand.
The work of Friedman and other monetarists changed the opinions of economic thinkers at that time.
The monetarists believed that inflation was a problem in the long run.
Most economists agree that inflation is caused by growth in the money supply.
We looked at unemployment in this chapter.
Expectations depend on the past history of the central bank.
Inflation expectations can be influenced by actual unemployment, so policymakers must increase it to reduce ments and pronouncements.
The ultimate can affect expectations of inflation.
Higher money growth leads to higher inflation.
The nominal interest rates are higher because of the simple quantity equation.
Real rates return to their original level when new money is created to finance large run, and nominal rates are per portion of their budget deficits.
Governments do this 3 times.
To stop hyperinflation below the natural rate of unemployment, the rate of inflation must be stopped and the government deficit must be closed.
P. 361 expectations of inflation, p. 372 real wages, and p. 372 growth version of inflation.
Money Growth, Inflation, and Interest Rates Understanding the ExpectationsPhillips Curve is about how an economy at full employment with inflation differs from one without inflation.
Explain the relationship between inflation and unemployment.
The real rate of interest is the nominal rate plus the inflation rate.
Natural rate is what countries with lower rates of money growth have.
In the long run nominal interest rates will stay the same.
A firm that expects higher profits from higher prices labor force that occurred when the baby-boom genera but does not recognize its costs are increasing is a firm.
The originalPhillips curve did not account for the low interest rates of the 1990s.
The rates are the natural rate of unemployment.
Real interest rates could be made negative if nominal rates did not fall below zero.
Explain carefully that the natural rate may shift between monetary neutrality and the over time and that policymakers may misunderstand the idea that the natural rate is independent of the longrun rect rate.
If the Fed targeted inflation, what would happen?
There are expected and actual costs.
Does the business lose money?
My wages are going up.
My bank pays 10 percent, but the firms in different locations.
All my real vacancies are being eaten up by the unemployment rate because of the 8 percent inflation rate.
Define the speed of money.
There is a related to Applica- tion 2 on the page.
The income is divided by the supply of money.
Inflation money supply and velocity are the same as the product.
Discuss the benefits of increasing the credibility of the central bank.
If the money supply grows 5 percent a year.
The growth rate of real output is the result of an upward shift in aggregate supply.
People hold less money when interest rates are high.
The Quantity Equation is used.
The growth rate with the central bank.
Germany had low inflation and a growth rate of 2 percent per independent central bank during the 1980s.
The credibility of the Fed is affected by using the tion to political and institutional factors.
He gave a speech to a group of bankers.
Understand the causes and origins of hyperinflation.
To eliminate a budget deficit, a government can raise taxes and/or inflation.
Blinder's speech caused an uproar.
Money tends to be less vigilant against inflation during hyperinflation.
Don't use the _____ lightly.
Inflation is called "hyperinflation" when the rate is greater than a percent per month.
The growth rate of their company is what causes hyperinflations.
Is it possible that this work is very high?
Why do we need to create inde term bonds?
If bond prices go up, the chairman of the central bank will get a bonus, but if they go down, the rest of the government will lose money.
Buying gold is a way to protect against inflation.
If Betsy sold hers for $133 and Erin sold hers for $130, economists say people would suffer from money illusion.
Bob and Pete are traders.
A year of preparing to talk about them in class.
An antique clock was purchased for $100.
Bob sold his house for $20 a few days later.
The clock Betsy bought was the same as the one she bought.
Pete waited a year and sold his stuff for $21.
Each year there had been inflation of 10 percent.
They sold their clocks to other people.
We are all aware of the economic challenges facing our nations.
Increased longevity is one of the reasons for this.
Sound economic policy is needed to address these issues, but political systems throughout the world seem incapable of responding to them.
The size and role of government, the appropriate level and structure of taxation, and the role that the state should play in our lives are all debated in almost all countries.
List the benefits and costs of running a deficit.
You can master each inflation targeting by summing the arguments in favor of MyLab Economics.
The debates involve a mixture of facts, theories, and opinions.
There is a large role for value judgments in economic debates.
If you believe low-income people should get a higher share of national income, your views on the proper role of tax policy will be different.
The size of government will depend on whether you believe individuals or the government should play a bigger role in economic affairs.
In the previous chapters, you learned the basics of economics and studied different theories of the economy.
You are ready to look at some of the policy issues in macroeconomics.
We need to consider answers to the question "Should we balance the fed country of running a deficit?"
If a govern ment initially had a debt of $100 billion and then ran deficits of $20 billion the next year, $30 billion the year after that, and $50 billion during the third year, its total debt at the end of the third year would be $200 billion.
The total debt would decrease if the gov ernment ran a surplus.
The government ran a surplus of $10 billion if the debt was $100 billion.
With the surplus, the government would buy back $10 billion of debt from the private sector.
In this chapter, we focus on the government debt held by the public, not the total federal debt, which includes debt held by other governmental agencies.
The total federal debt is highlighted in popular accounts in the press or on the Web.
The public's debt is the best measure of the federal debt's burden on the economy.
Over the last 30 years, the fiscal picture for the United States has changed.
David Stockman, the director of the Office of Management and Budget in Ronald Reagan's administration, said that the federal budget ran large deficits as far as the eye could see.
Stockman could not see what would happen in the late 1990s.
The federal government ran a budget surplus in 1998 for the first time in 30 years.
For the next 3 fiscal years, it continued to run surpluses.
There were two reasons for the surplus to emerge.
Tax revenues from the sales of stocks and bonds grew more quickly than anticipated.
Federal budget rules limited total spending.
President George W. Bush proposed tax cuts when he took office in 2001.
Over the course of the decade, Bush and Congress passed a tax cut amounting to over a trillion dollars.
The CBO estimated at that time that the federal government would continue to run surpluses through 2010.
As a result of these federal government surpluses, the out standing stock of federal debt held by the public would be reduced.
The stock of debt relative to GDP would decline because GDP would be growing.
The CBO estimated that the ratio of debt to GDP would fall in 2011.
During wars and the Great Depression, the ratio tends to rise and fall, except for a period in the 1980s.
The debt/GDP ratio would be relatively low by the end of the decade, according to the CBO.
The nation's debt/gDP ratio tends to rise during wars because more spending is needed to finance them.
The debt/GDP ratio was prevented from falling by a series of events.
As wars were launched in Afghanistan and Iraq, the fight against terrorism led to higher spending on homeland security and the military.
The recessions of 2001 and 2007, the collapse of the stock market, and the Bush tax cuts all reduced tax revenues.
The deficit was caused by new tax cuts and spending in President Obama'sStimulus package.
The federal government ran a budget deficit of over a trillion dollars in the fiscal year of 2011.
The deficit fell to $483 billion by the end of the year.
The debt/GDP ratio was 74.1%.
The debt/GDP ratio will remain at this level for several years according to the CBO.
wars, demographic pressures, recessions, and the choices our politicians make on spending and taxes are just some of the factors that affect federal budgets.
The debates over the national debt have been going on for a while.
One option is to borrow $400 from the public in exchange for government bonds.
The government will have to pay back $400 plus interest in the future.
$400 worth of new money can be created to cover the gap.
In principle, governments could use a mix of borrowing money and creating money, as long as the total covers its deficits: government deficit + new borrowing from the public + new money created Existing government bonds can be bought by the Federal Reserve.
The Federal Reserve creates money by taking debt out of the hands of the public in exchange for money if it purchases the government's bonds.
Purchases by a central bank of new money will cause inflation.
Between 2005 and 2006 the Federal Reserve purchased only $34 billion in government bonds, which was less than the entire amount of government bonds issued by the Treasury.
The rest was sold to the public.
The Fed added over a trillion dollars to its balance sheet during the financial crisis.
The money supply held by the public was prevented from increasing by banks holding excess reserves and paying interest on them.
Inflation was prevented from emerging.
Deficits will inevitably cause inflation if the public is unwilling to buy bonds, as was the case in Hungary during World War II.
Hyperinflations occur when economies run large deficits.
In addition to Hungary, other countries that have experienced massive inflations because they monetized their deficits are Germany and Russia after World War I, Argentina in the 1980s, and Russia in the 1990s.
The United Kingdom, the United States, and Japan don't monetize much of their debt because they are able to borrow from the public.
Deficits do not lead to inflation in these countries.
The national debt can impose two different burdens on society, both of which will fall on the shoulders of future generations.
A large debt can reduce the amount of capital in the economy and reduce future income and wages for its citizens.
Capital stock is increased by the savings of individuals and institutions.
The companies that issue bonds and stocks use the proceeds to invest in plants and equipment.