Question

Why might a central bank choose to monetize the debt, knowing that it could lead to higher inflation?

Short answer

The central bank would choose to monetize the debt despite the fact that doing so could lead to higher inflation because when the debt is repaid, the central bank returns it to the treasury. So the money supply increase temporarily, creating inflation but also increasing aggregate demand without having the government actually need to repay the debt.

Step-by-step solution

Step 1. Define inflation.

Inflation is defined as a broad, gradual increase in the prices of goods or services in a market.

Step 2. Explanation

The central bank would choose to monetize the debt despite the fact that doing so could lead to higher inflation because when the debt is repaid, the central bank returns it to the treasury. So the money supply increase temporarily, creating inflation but also increasing aggregate demand without having the government actually need to repay the debt.