Question

(b) What are the advantages and disadvantages from an overall economic perspective of using monetary financing to fund budget deficits as opposed to governments borrowing from markets in the usual way? Fully explain 5 advantages and 5 disadvantages

Answer 1

Monetary financing means he printing of new notes in the economy with the help of Central Bank of the country or any nation.
But it is not a good idea to finance the budgetary deficit in the economy because of the following reasons:
1 Using the monetary financing would damage the credibility of the economy for controlling the inflation and deflationary situation in the economy.
2 It will also create the instability in the balance sheet of the central bank of the country because the print of excess money in the economy will the disturb the one side of the balance sheet of the central bank.
3 The printing of the money in the economy will also create the uncontrollable inflationary situation in the economy.
4 Its consequences are very disastrous in the long run and it will reduce the overall the performance of the economic growth.
5 It decreases the productivity of the economy and without productivity the economy will not perform well in the coming financial year.
Five advantages of the monetary financing are as follows:
1 Sometimest creates the short term solution for the budgetary deficit in the economy.
2 It is a good policy for the short run because it does not create the interest burden on the economy by taking the financial aid or help or loan form the international financial institute like IMF and World bank.

3 It is a policy of the sudden control of the excess demand in the economy.
4 It is helpful in the reduction of debt capital on the economy.
5 It is helpful in the direct action plan for the inflationary situation in the economy.