Using money creation to pay for government spending Consider Kharkeez, a hypothe

Question

Using money creation to pay for government spending Consider Kharkeez, a hypothetical country that produces only veggie burgers. Initially, a veggie burger is priced at dollar 2.00. Vicky has dollar 100 in her wallet, and, with this, she can purchase veggie burgers. Suppose the government of Kharkeez cannot raise sufficient tax revenues to pay its debts. In order to meet Its debt obligations, the government prints money. As a result, the money supply rises by 40 percentage. If monetary neutrality holds, the 40 percentage Increase in the money supply will cause the price of a veggie burger to to. After the government prints money to pay its debts, the dollar 100 in Vicky's wallet will purchase veggie burgers (round down to the nearest whole veggie burger). The Impact that the government's decision to raise revenue by printing money has on the value of the money In Vicky's wallet is known as the .

Explanation / Answer

3. Using money creation to pay for government spending:

Initially, a veggie burger is priced at $2. Vicky has $100 in her wallet, and, with this, she can purchase 50 veggies.

If monetary neutrality holds, the 40% increase in money supply will cause the price of a veggie burger to increase to $2.8. After the government prints money to pay its debts, the $100 in Vicky's wallet will purchase 36 veggie burger.

The impact that the government's decision to raise revenue by printing money has on the value of money in Vicky's wallet is known as inflation.

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