The government is one of the largest debtors in the economy. It can reduce the size of
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The government is one of the largest debtors in the economy. It can reduce the size of this debt by inflating the currency but only if savers are unprepared for inflation. If savers are prepared, they will lend the government less and demand higher interest rates. The economy is best off when the government does not inflate and the public does not prepare. Suppose the payoff matrix looks like this:
a. If this is a noncooperative game, what will the outcome be?
b. Some economists call for the government to precommit itself to not inflating (for example, by using a gold standard or by a fixed growth rate). How will this affect the economy? Why is a commitment necessary?
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a The government inflates and savers prepare making both worse off b If ...View the full answer
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