From what I know, the government can make cash out of thin air, but this causes inflation levels to rise. Or is everything they’re giving out just their surplus?
In: Economics
Government spending is supposed to cause inflation, but the mechanism for how this happens is different depending on how the government is spending the money.
The usual way that we talk about the government spending money is for it to buy things. For simplicity let’s say the government is buying boats (for, like, the Navy). So, the government rolls in and says we are buying 10,000 extra boats this year! All of the stuff that goes into making boats (factories, raw materials, dry docks, and all the workers) are like “huzzah! Let’s build these boats!”
Now you come in to the boat store and want to buy that $100,000 boat you have been dreaming about…but the boat makers are booked for months with building all these govt boats. If you want your boat built, it’s gonna cost you $120,000. Bam! Inflation!
This is the government “crowding out” private sector spending, forcing prices to go up.
With the pandemic stimulus, tons of people are out of work or working fewer hours. These people used to be spending money, but suddenly had to cut back drastically. All the shops that depended on their spending are seeing huge drops in sales. The stimulus is allowing people to restore their spending to pre-pandemic levels while we wait to get vaccinated. In this case, there’s not a ton of spending that’s being displaced, or “crowded out” like in the first example.
Latest Answers