Prime Minister Imran Khan asks for a plan to increase government spending to offset the fall...

Prime Minister Imran Khan asks for a plan to increase government spending to offset the fall in investment. The Finance Minister recommends three alternative choices to finance the plan: [06]
(i) An equal increase in taxes to fund expenditures.
(ii) Borrow the money by issuing new government bonds and maintain tax revenues invariable
(iii) Finance the expenditures by printing of money and maintain tax revenues invariable.
Order these financing alternatives from most expansionary to least expansionary. Also explain your ranking.
b) - The Conservative Party of United Kingdom always criticize the crowding-out effects of the government borrowings on private investment. The candidate for Prime Minister from Conservative Party argues that the UK government should just print money to manage the budget deficit. Discuss the merits and demerits of this scheme?

Solutions

Expert Solution

A)I. financing of expenses through printing of money and maintaining tax revenues in variable will be helpful because this will be increasing the money flow into the entire economy and it is a part of expansionary policy.

II.borrowing of money by issuance of New Government Bonds and maintaining tax will be leading to lesser amount of Reserve available to the banks because issuance of Government Bonds will be leading to these bonds getting subscribed by the public and there would be a decrease in money flow in the economy.

III. Equal increase in taxes will be leading to decrease in the money flow in the economy and it is non expansionary policy.

B. Printing of money in order to manage the the budget deficit will be decreasing the value of domestic currency in the overall global scenario because it is a part of devaluation due to higher amount of money flow available in the economy in order to fund the deficit.

this method will be helpful in the short run in order to curb out the deficit but in the long run, it will be having a multiplier negative effect by devaluation of the currency and increasing of the inflation to such extent which will not be easily manageable.

jeff jeffy answered 2 years ago

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