With everything being the same, the more money a government borrows, the more likely it is that inflation will rise shortly after in that country.📈 ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
This is because government will have to pay back the money at some point by either reducing its spending (it's expenses) or raising more money through increasing taxes (it's income). Or if those two don't work, the Government can just print money. Yep! Literally 👀 ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
If the Government cuts its spending or increases taxes, this usually means there is less money supply in the economy as the Government is either spending less or consumers are spending less due to higher taxes.This also reduces investor confidence in the economy ⚠️⚠️(as taxes are high and spending is low) and so there will be even less demand for Uk currency to invest. ⠀⠀⠀⠀⠀⠀⠀⠀⠀
The other option will be to print new money, In this case the money supply💰💰 increases in the economy and the Government has more money to spend on bonds and infrastructure which all help boost the economy. ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
So how does Government borrowing affect inflation?
The value of money is just like anything else: when demand for money goes down and/or the supply of money increases, its value falls as there is more money available but little demand for it. A fall in the value of money means your money is now worth less than it was before and can now buy you less goods. (i.e. A can of soda which you would have bought for £10 before will now cost you £12.)
A decline in the value of money is the same thing as higher inflation – in both instances money buys fewer things. And thus, higher government borrowing eventually leads to the factors which erode the value of money – and increase inflation.🤔
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