Question

Why do governments sometimes pay for their spending by printing more money? Why do economists refer to this as an ‘inflation tax” that can result in very harmful results?

Answer 1

Answer - When the government has to increase the spending , and it has limited sources of borrowing , or it has to pay off its debts but does not have enough revenues to pay , it decides to print the currency. This increases the supply of money in the economy. The more money is spread into the economy on the existing amount of goods. Hence this causes inflation in economy due to greater money supply and leads to rise in price levels and reduction in value of money