Question

Why would policymakers advocate printing money to pay for government spending?

What impact does printing money to pay for government spending have on the public?

Answer 1

SOLUTION

POLICY MAKERS ADVOCATE PRINTING MONEY TO PAY FOR GOVERNMENT SPENDING.WHY?

Modern monetary theory or Modern money theory ( MMT) is a heterodox macroeconomic theory that descries currency as the public monopoly for the government and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and to satisfy safety desires. MMT is an evolution of charatalism and is sometimes referred to as neo - chartalism. Its macro economic policy prescriptions have been described as being the version of theory of functional finance. MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes and issuing bonds to remove excess money from the system. MMT is controversial, with active debate about its theoretical usefulness, and the effectiveness and risk of its policy prescriptions.

IMPACT ON PRINTING MONEY TO PAY FOR GOVERNMENT SPENDING ON PUBLIC

Printing money to raise revenue for financing the budget deficit which causes inflation is like an inflation tax. This is because the government is able to get resources through printed money which causes inflation and reduces the real value of the holdings of the money by the public and if the government print money to pay off the national debt, inflation could rise. This increase in inflation would reduce the value of bonds. If inflation rises, people will not want to hold bonds because their value is falling. Printing more money doesn't increase the economic output - it only increases the amount of cash circulating in the economy. If more money is printed consumers are able to demand more goods, but if the firms have still the same amount of goods, they will respond by putting up the prices. In a simplified model, printing money will just cause inflation.