Question
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
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
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