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A politician has studied the balance sheet of a central bank in her country, and determined...

A politician has studied the balance sheet of a central bank in her country, and determined that the central bank holds 4 trillion freebies (the currency of the country) worth of bonds issued by government of the country. The politician proposes that the central bank should just cancel these bonds, releasing the taxpayers from having to pay the debt. What will be the effects of this policy proposal, if it is implemented?

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Answer #1

Following will be the effects of this policy proposal, if it is implemented:

  1. The Central bank is also a government sector bank and the bonds are also issued by the government. So the debt will be netted out from the balance sheet. The central bank will have to wipe out its capital base.
  2. There should be no visible impact anticipated on the private sector due to this cancellation.
  3. There would be an immediate stimulation in the demand in the economy.
  4. It would reduce the burden of debt on the public
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