What will happen if a country uses money creation to finance a large and expanding national debt?
A) Real output and employment will grow rapidly.
B) Nominal interest rates will fall.
C) The foreign exchange value of the currency will increase.
D) The rate of inflation will rise.

Question

Quizplus · Accepted Answer

By using money creation to finance a large and expanding national debt, the money supply in the country will increase, which will lead to a decrease in the value of the currency and ultimately an increase in the rate of inflation. As more money is inserted into the economy, the purchasing power of each unit of currency will decrease, causing the prices of goods and services to rise. This increase in inflation can have negative effects on the economy, such as reduced consumer and investor confidence, and can lead to higher interest rates in the future to combat inflation.

What Will Happen If a Country Uses Money Creation to Finance