Author Question: Explain haircuts when a government defaults its debt. What will be an ideal ... (Read 69 times)

misspop · **on:** Jun 30, 2018

Explain haircuts when a government defaults its debt.

What will be an ideal response?

Question 2

Suppose the central bank decreases the rate of growth of the money supply. What effect will this decrease in money growth have on seignorage in: (1 ) the short run; and (2 ) the medium run? Explain.

What will be an ideal response?

jaygar71 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Default is often partial and creditors take is what is known as a haircut. A haircut of 40, for example, means that creditors receive 60 of they were owed.

Answer to Question 2

Seignorage equals the rate of growth of H times real money balances. In the short run, the decrease in money growth will likely cause a reduction in seignorage as long as H/P does not change or does not fall significantly. H/P is a function of real income and the nominal interest rate. In the short run, Y will fall and i will likely rise so H/P will decrease. In the medium run, Y will not change. The decreased money growth will cause a reduction in inflation and a reduction in the nominal interest rate causing H/P to increase. Therefore, the effects of a decrease in money growth on seignorage are ambiguous.