Question

1.

a. Why might the level of government debt affect the government's incentives regarding money creation?

b. Are governments like households? Describe the similarities and differences between government debt and household debt. Should we treat government debt in the same way we treat household debt?

Answer 1

Part A

The level of government debt might affect government incentives regarding the creation of money. It is because government debt is always specified in nominal terms. When the economy is facing a higher price level that reduces the real value of the government debt. That means the higher debt encourage the government to print money to raise the level of price and reduce the real value of its debt.

Part B

We know that government debt is the annual financial deficit of the country. It is a flow variable, and it is the difference between receipts and payments of the government over a financial year.

The household debt is the combined debt of the whole people in the household. It includes loans and mortgages.

So both household debt and government debt are dissimilar.