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Outline the way in which a government which issues money can gain real resources. How relevant is th

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  • Essay length: 1657 words
  • Submitted: 19/06/2006
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University Degree Macroeconomics

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Outline the way in which a government which issues money can gain real resources. How relevant is th

In almost all modern economies the government plays a central role and will need to pay for its own expenditure. Funds for government expenditure will generally be raised by taxation. But when spending exceeds taxation revenue the government runs a budget deficit and will need to borrow the difference. It can borrow from the private sector by issuing interest-bearing government debt (bonds). Alternatively the public sector can finance the shortfall by borrowing from the central bank (Bank of England in this case) effectively issuing non-interest bearing high-powered money (defined as notes, coins and banks' operating balances at the Bank of England or M0 in the UK). Hence the government faces a budget constraint in a similar way as each individual consumer does, except that it has the right to "print" money. The purpose of this essay is to examine how the government can gain real resources by this method and whether or not it is a significant option in the UK.

Any budget deficit must be financed by additional bonds or extra money balances and this government budget constraint

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