What are the two ways government can finance a budget deficit?
Solution
A budget deficit means that expenses exceed tax revenew. Here are 2 ways the government can finance this:
1.) Borrowing: Government can sell treasury bills to its citizens or to other nations. This is an investment that can be veiwed by the investor as safe or risky, depending on the likelyhood that the government will be able to pay its debts. Selling treasury bills is a way for government to pay for things in the present, by promising to cut spending in the future. It will have to cut spending later, in order to pay back the investors plus interest.
2.) P rinting Currency: The country\'s central bank can decide to have the treasury create more currency. Part of this new money will be physically printed and coined, but the bulk of it will be created by making a computer entry. Increasing the money supply (inflation) has been a method of financing unfunded government expenses for thousands of years. By adding more money into the economy, it decreases the value of money already there. Hence, it acts as a hidden tax on people who have saved money.
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What are the two ways government can finance a budget deficit-Solution.docx
1. What are the two ways government can finance a budget deficit?
Solution
A budget deficit means that expenses exceed tax revenew. Here are 2 ways the government can
finance this:
1.) Borrowing: Government can sell treasury bills to its citizens or to other nations. This is an
investment that can be veiwed by the investor as safe or risky, depending on the likelyhood that
the government will be able to pay its debts. Selling treasury bills is a way for government to pay
for things in the present, by promising to cut spending in the future. It will have to cut spending
later, in order to pay back the investors plus interest.
2.) P rinting Currency: The country's central bank can decide to have the treasury create more
currency. Part of this new money will be physically printed and coined, but the bulk of it will be
created by making a computer entry. Increasing the money supply (inflation) has been a method
of financing unfunded government expenses for thousands of years. By adding more money into
the economy, it decreases the value of money already there. Hence, it acts as a hidden tax on
people who have saved money.
