Advanced Macro & Growth · intro
What moves on the Government Budget Constraint & Seigniorage diagram
A bigger deficit financed by money creation needs a higher inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. tax. As the deficit line approaches the Laffer peak, the stable equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. runs out of room.
The government cannot tax or borrow enough, so the deficit is financed by printing money.
War spending explodes and the deficit line jumps up.
The required inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. rate slides up the seigniorageseigniorageGovernment revenue from printing money, an implicit tax paid through inflation. hill toward the peak.
Get too close to the peak and there is no room left: one more shock tips the economy into the unstable region where hyperinflation lives.
Examiners ask this as: war finance, printing press, war deficit, military spending, weimar reparations.
Other scenarios on Government Budget Constraint & Seigniorage