Question

From a funding perspective, explain why governments issue government bonds treasury notes in order to manage the liquidity risk in government finance

Answer 1

From a funding perspective, governments issues government bonds and treasury notes in order to put out cash or liquidity of the economy and manage the liquidity risk in government finance.

When the exist inflation in the economy, the government can stop inflationary situation only by debarring the people from spending more on consumption and raising the prices which creates inflation. This objective of the government is achived through issuing government bonds and treasury notes and put out liquidity of the economy.

On the contrary, during the period of recession, the government purchase these government bonds and treasury notes back from people to infuse liquidity in the economy.

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