Inflationary Spiral from Currency Substitution

Investor Behavior in a High-Inflation Economy

A country is experiencing a rapid and sustained increase in its general price level. The government, which is running a large budget deficit, attempts to raise funds by issuing new long-term bonds to the public. Which of the following statements best analyzes the likely public response to this bond issuance?

Evaluating Government Bond Issuance During High Inflation

In an economy experiencing severe and accelerating price increases, a government can successfully fund its deficit by issuing new bonds as long as it offers a nominal interest rate that is higher than the current rate of inflation.