Part B: The average maturity of outstanding U.S. treasury debt is a little more than 5 years. Suppose that a newly issued 5-year treasury note has a coupon rate of 2 percent and sells at par. What happens to the value of this bond if the inflation rate rises 1 percent point, causing the yield to maturity on the 5-year note to jump to 3 percent shortly after it is issued.

Assume that the average Treasury security outstanding has the features described in previous question (part B) . If total U.S. debt is $16 trillion and an increase in inflation causes yield on treasury securities to increase by 1 percent point, by how much would the market value of the outstanding debt fall? What does that suggest about the incentives of government policy makers to pursue policies that could lead to higher inflation?