1. Explain (i) the meaning (i.e., define—what is it or what does it mean?) and (
ID: 1164651 • Letter: 1
Question
1. Explain (i) the meaning (i.e., define—what is it or what does it mean?) and (ii) the significance of the following within MMT.
a. “taxes drive money”
b. “we can think of a government and central bank as a consolidated government sector”
c. “taxes and bonds do not finance government spending”
d. “loans create deposits”
e. “There are 2 choices for keeping unemployment from falling too low and causing inflation—an unemployed buffer stock of stock of workers and an employed buffer stock of workers”
f. “(S-I) = (G-T) + NX”
Explanation / Answer
a. Taxes drive money: It actually means the taxes actually reduce the money supply. The money is taken away by increasing tax and similarly it can be increased by giving relaxation in tax. A sovereign government imposes tax and it determines sifficosuf level of tax. All taxes in currency and it actually drive the money in modern monetary system.
b. We can think of a government and central bank as a consolidated government sector. - In modern day the government and the central bank closely work together. Any monetary denomination create or supplying money or purchase by government sector is possible through creation of money. It is under control of government. So in modern monetary theory we think government and central bank as a consolidated government sector.
c. Taxes and bonds do not finance government spending. - taxes and bonds do not finance government spending means taxes and bonds are not used to finance the government spending. It means any kind deficit financing or government expenditure are not financed by changing tax or issuing bond. In modern monetary theory government spending are financed through create money or supplying money. Government can issue any kind of denomination of money and control the money supply. Taxes and bonds not that much role in government expenditure.
d. Loans create deposits- Whenever a loan is created it means a certain amount is kept in deposit. This reserve ratio are important to create more deposit. If we do not create loans the deposit will not increase. Everytime when loan is created person to person certain amount is always kept because of minimum reserve ratio. This reserve ratio actually helps in more deposit. So loans actually creates deposits.
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