Once upon a time, in a far away land, King Maudit was spending on new temples and

statues. He needed cash and fast. So the King headed down KingPath, stood on his

favorite peacock chair, and declared he was selling King Bonds (government bonds).

"Why should we buy the bonds from you?" the crowd shouted. King Maudit pledged, "I'll

pay good interest! 6%, 7%, ... okay, okay, 12% and the King Bonds are as secure as

currency."

People lined up to buy K-Bonds. They were better deal than the private bank or the stock

market. King Maudit continued to borrow until:

1.

One day the Tatay Group decided to bor-

row to build a new factory. But

the King had borrowed so much,

there was little money left. The

Tatay Group and other businesses

that wanted to expand found them-

selves bidding against one another for

the small amount of savings available

for loans.

"I'll pay 10%" shouted one. "I'll pay 12%,"

shouted another. Interest rates esca-

lated. Tatay Group canceled its plan

for a new factory. Others did the

same. It wasn't long before the King's

economy stagnated.

2.

The king had a bright idea. He would ask

his favourite courtier, Das, to print up

some money! He was informed that

most money was no longer currency

but in bank checking deposits. So, he

ordered Das to buy all the King Bonds

so that he could pay his bills.

With all the money earned in government

projects, the town went on a buying

spree. Shops were bustling and shop-

keepers couldn't keep up with orders.

It wasn't long before prices in the land

went up, up, up. Prices soared and

castles were soon out of reach of young

citizens. Inflation had come to town.

3.

Prior to the King's building program, the

economy had languished in recession.

Unemployment had been above 7%

and businesses were discouraged from

investing in the new plant and equipment because of the poor business

outlook.

After the King's program, employment

picked up not only in temple and

statues building, but also across the

economy because businesses were

more optimistic about the future and

started to expand their capacity. The

town economy boomed!

4.

Banks and wealthy individuals in Chino,

a land east of the town, heard of high

interest rates and wanted to invest

in King Bonds too! So, they eagerly

bought a high percentage of the King

Bonds. As a result, there were savings

in Town for lending to the Town's local corporations, so interest rates fell

back to 8%.

Years later, investors form Chino started

to sell the Bonds and used the proceeds to buy things in the King's

Town. Soon, citizens found that

their most desirable goods and services were being exported to Chino,

and that the Town real estate and

businesses were owned by foreigners.

Question.

1. Which ending most closely corresponds to the Indian economy today? Make an argument supported by reliable literature.

#1 Crowding out

#2 Monetizing debt

#3 Keynesian (Crowding in)

#4 Foreign debt