Government deficit financing is made easier by a rise in inflation when inflation ________ the private sector's demand for high-powered money,which the government can ________.

Question

Quizplus · Accepted Answer

When inflation raises, the private sector's demand for high-powered money also goes up. This means that the government can create and spend money more easily without having to rely on taxation or borrowing as much. Therefore, option C is the correct choice. Option A is incorrect as it suggests a decrease in inflation leads to an increase in demand for high-powered money by the private sector. Option B is incorrect as it suggests that the government obtains high-powered money through taxation, which is not necessarily true. Option D is also incorrect as it suggests that inflation leads to increased taxation, which might not always be the case.

Government Deficit Financing Is Made Easier by a Rise in Inflation