Question

The government increases its expenditure in the current period. However, in- stead of financing this increase...

The government increases its expenditure in the current period. However, in-
stead of financing this increase by raising taxes, it decides to finance it by
printing money. What are the effects of this policy on aggregate output, con-
sumption, investment, employment, the real wage, the real interest rate, the
nominal wage and the price level?

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Answer #1

When government decides to print money to finance its expenditures, then it will result in inflation and thus increase in price level.

Output will increase as production will increase due to more money in hands of everyone

Consumption will increase

Investment will increase

Employment will increase

Real wages will fall as inflation will rise

Real interest rate will fall as inflation will rise

Nominal wages remain unchanged

Price level will rise due to inflation

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