Question

Why do governments sometimes pay for their spending by printing more money? Why do economists refer to this as an ‘inflation tax” that can result in very harmful results?

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Answer 1

Government sometimes print more money just to pay their expenditures. Government get more money in form of taxes , borrowing or printing more money. When a country have high spending and low tax revenue then it has to print money in order to increase its revenue. When the government increases the printing of money it is engaged in inflation tax that is why it is refered as inflation tax by the economists . Printing money results increase in the price due to which existing money held by people decreases. Economists refer to this as inflation tax is inflation tax means a tax on people holding the money.

Printing money by the government will increase the value of the existing goods and services in comparison to large amount of dollars. This results in inflation and when the printing increases the amount of Those goods and services also increases. Basically what government benefits is they get the first value and the current value for every value of money which is printed by the government . The Printing of new money will totally result in devaluation of money which is already printed by this happen only after the circulation of new money printed in the economy. Printing value by the government will also used the to pay the national debt thus results in the inflation rate. Even the value of bonds is also decreased as a result of Increase in inflation rate.