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SYRIANKID
11-11-2006, 10:54 PM
It's been a while since my macro days so maybe someone can remind me if I'm making a mistake. We know that one aspect of monetary policy is changing money supply, for example, increasing money supply by printing more. This expansionary monetary policy shifts LM to the right, increasing output and lowering interest rates.

We also know that expansionary fiscal policy can involve increasing government spending, which can be funded by selling government bonds to the people. To sell these bonds, interest rates are usually raised since outstanding price is inversely related to rates. So this shifts the AD curve right, raising output while raising interest rates.

So essentially, a government follow up an expansionary fiscal policy with an expansionary monetary policy, buying back bonds simply by printing additional money later.

Where does this leave the person who's purchased the government bonds? Yes, he's richer in the process, but isn't he just becoming the owner of the money that was inevitably going to be printed when the money supply increased?

Discuss.

Itchy Nads
11-11-2006, 11:24 PM
I don't know that they simply print additional money. This would lead to inflation.

In order to decrease inflation, you have to draw money out of the economy. This is done via the increasing of interest rates. In order to stimulate spending and economic activity, interest rates are dropped which allows more money to circulate in the economy.

In a lot of situations, bonds will be issued in order to fund government investments. When the time is up, the bonds are purchased back. In one sense, money is being drawn out of - then paid back into - the economy.

Obviously, **** is far more involved than that, but I'd have to study up on macro again too. But I don't think it's as simple as printing money - Germany did that in the 20's in order to pay off the national debt. Hyperinflation was the result.

Weightaholic
11-11-2006, 11:27 PM
I don't know that they simply print additional money. This would lead to inflation.

In order to decrease inflation, you have to draw money out of the economy. This is done via the increasing of interest rates. In order to stimulate spending and economic activity, interest rates are dropped which allows more money to circulate in the economy.

In a lot of situations, bonds will be issued in order to fund government investments. When the time is up, the bonds are purchased back. In one sense, money is being drawn out of - then paid back into - the economy.

Obviously, **** is far more involved than that, but I'd have to study up on macro again too. But I don't think it's as simple as printing money - Germany did that in the 20's in order to pay off the national debt. Hyperinflation was the result.

Correct, good sir!

SYRIANKID
11-11-2006, 11:36 PM
I don't know that they simply print additional money. This would lead to inflation.

In order to decrease inflation, you have to draw money out of the economy. This is done via the increasing of interest rates. In order to stimulate spending and economic activity, interest rates are dropped which allows more money to circulate in the economy.

In a lot of situations, bonds will be issued in order to fund government investments. When the time is up, the bonds are purchased back. In one sense, money is being drawn out of - then paid back into - the economy.

Obviously, **** is far more involved than that, but I'd have to study up on macro again too. But I don't think it's as simple as printing money - Germany did that in the 20's in order to pay off the national debt. Hyperinflation was the result.

Yes of course it's not just about printing money. You're absolutely right about the concept of money supply being an interplay between what is being spent and saved. But keep in mind that government spending and private spending both work in the same way. Just because the government is using the cash for its purposes doesn't mean money has been "taken out" of the economy. And while printing money isn't just done frivolously whenever needed, it IS an agent of change for monetary supply, as I mentioned above. So my question is specifically on this idea.

Itchy Nads
11-11-2006, 11:38 PM
Correct, good sir!

Why thank you :D

Itchy Nads
11-11-2006, 11:40 PM
Yes of course it's not just about printing money. You're absolutely right about the concept of money supply being an interplay between what is being spent and saved. But keep in mind that government spending and private spending both work in the same way. Just because the government is using the cash for its purposes doesn't mean money has been "taken out" of the economy. And while printing money isn't just done frivolously whenever needed, it IS an agent of change for monetary supply, as I mentioned above. So my question is specifically on this idea.

No, government spending increases aggregate demand within the economy and theoretically at least will increase domestic consumption and demand. It's when the money is drawn from the economy and spent outside of the economy - i.e. reducing national debt - that government spending does not have an effect on the spending of consumers.

TricepsNGirls
11-11-2006, 11:44 PM
So essentially, a government follow up an expansionary fiscal policy with an expansionary monetary policy, buying back bonds simply by printing additional money later.

Where does this leave the person who's purchased the government bonds? Yes, he's richer in the process, but isn't he just becoming the owner of the money that was inevitably going to be printed when the money supply increased?

Discuss.

Selling bonds curbs inflation by decreasing the money supply.

The money supply is relatively stable but is sometimes altered to correlate with changes in GDP. Printed money is very carefully monitored. The majority of funds are electronic credit because you don't want to promote currency trade, money laundering, and whatnot.

We also don't need much printed money because transfers are largely made from bank to bank. Electronic credit expedites the loan and transfer process.

I wasn't very interested in econ so I can't tell you much more, but look up fractional reserve banking and it should tell you a bit about money supply. Buying back bonds doesn't require additional banknotes, btw.

SYRIANKID
11-12-2006, 12:20 AM
Buying back bonds doesn't require additional banknotes, btw.

Of course not. But I was specifically thinking of the scenario when money was to be printed. Since it would be in government control, it would be distributed directly to bond holders at that time.

Itchy Nads
11-12-2006, 05:19 AM
Of course not. But I was specifically thinking of the scenario when money was to be printed. Since it would be in government control, it would be distributed directly to bond holders at that time.

If they want to drive up inflation, sure. The money set aside to pay for the bonds normally would exist elsewhere within the economy, and the extra money printed would place more cash in the hands of private citizens. Extra cash = too much money chasing too few goods. Unless a large majority of private citizens are net savers, inflation will jump.