Answer to Question #99156 in Macroeconomics for Ritwick Gautam

Question

“Governments increase the money supply too rapidly because it enables them to finance an expanding government sector without increasing taxes or borrowing from the economy’s savings”

a) What is the drawback of this policy choice?

b) What is meant by borrowing from the economy’s savings?

Answer 1

The drwaback of increasing money supply is falling price for money in a national economy. Simply speaking, growing money supply is going to lead to inflation in a national economy. The other choice in the case under consideration would be issuing of governmental and treasury bonds to finance growing governmental sector. Financial resources would be invested from savings to governmental securities. It stands for borrowing from the economy's savings.