Question18 Last week we considered accommodation monetary policy vs. increasing the Federal Funds Rate to prevent rising inflation . Over the past month , the US stock market has been on a roller coaster ride , indicating changes in investor confidence . The changes in federal taxes and spending and additional US debt burden are likely contributing causes of changes in investor confidence in the stock market . The United States federal government is responsible for meeting the spending obligations of the US government , or its ' unpaid bills . " Krugman & Wells ( 2015 ) . explained if taxes are insufficient to cover government spending then the federal government must borrow to cover the difference . Government borrows by issuing US Treasuries ( Chapter 10 , Matching Up Savings and Investment Spending ) . In the article " U.S. Government Deficit Grew 17 % in Fiscal 2018 : Tax - law changes led to flat revenue in fiscal 2018 , U.S. Treasury says " author Kate Davidson ( 2018 , October 18 ) reported , " The U.S. government ran its largest budget deficit in six years during the fiscal year that ended last month , an unusual development in a fast - growing economy and a sign that -- so far at least -- tax cuts have restrained government revenue gains . " The United States government finances its debt through Treasury auctions . The Treasury sells short- , intermediate- , and long - term IOUS , known as bills , notes , and bonds , respectively . US Treasuries are subject to the same laws of supply and demand as the Federal Funds money market we discussed last week . The price and interest paid on U.S. government debt is determined by the forces of supply and demand . When there are few bonds and a lot of demand prices rise and interest rates fall . When there are a lot of bonds compared to demand prices fall and interest rates rise . When there is a gut , supply exceeds demand for new Treasuries . This temporarily pushes prices for bonds down and pushes up yields ( interest rates ) . The 10 - year Treasury yield was 2.69 percent - but ultimately added a basis point , ending at 2.70 percent . ( A basis point is a hundredth of a percentage point . ) ... The higher that interest rates are on Treasuries , the more interest the Treasury must pay to bond holders . And the higher the excess of the supply of US Treasuries over demand , the more interest rates will rise . Herbert Hoover , 31st President of the United States said , " There are only three ways to meet the unpaid bills of a nation . The first is taxation . The second is repudiation . The third is inflation . In light of what we learned in the recent Chapter 13 : Fiscal Policy , in contrast with Chapter 15 : Monetary Policy , and this week's chapters 16 and 17 , think about the recent decisions by those in the US federal government to take on more federal debt by lowering taxes and running a larger US Federal deficit , and the implications these decisions might have on future inflation and interest rates . Do you think the economy will grow fast enough so that increases in US GDP and US tax revenues on that spending will compensate for the decrease in taxes ( the " Trickle down " philosophy ] ? Or are you more concerned about rising interest rates threatening the US economic expansion , and a growing US federal debt ? Defend your position with economic theory and data . Consider the Phillips Curve . Consider the expected changes in inflation and / or unemployment and who would be impacted by those changes ( for example , borrowers , lenders , the unemployed , retirees on pensions , young workers , those nearing retirement ) . Use current economic data from the Bureau of Labor Statistics , the Census Bureau , the Federal Reserve , etc.