Question

Suppose the government can raise 10 goods worth of revenue by printing money (seigniorage) or by collecting a lump-sum tax. In both cases, the revenue is used to make a lump-sum transfer payment to each old person. Which option is preferred?

Answer 1

Ans) Seigniorage is the term used when government raises revenue by printing more money. By printing more money, government increases money supply, which increases inflation. So, printing money is like inflation tax. As value of money held by the public decreases. This suggests that financing through seigniorage is obviously not a good idea.

On other hand, using tax to support government spending is a better idea, as it redistributes wealth and also keeps inflation in check by controlling the supply of money.