Government Financing Methods
A government decides to finance the construction of a new national highway system by creating and spending new physical currency, rather than by selling interest-bearing securities to the public. From the government's perspective as a borrower, explain the primary financial advantage of using newly created currency for this purpose.
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A government needs to finance a new public project. It can either issue bonds that require it to pay 5% annual interest to bondholders, or it can print new physical currency to cover the project's costs. Focusing solely on the direct costs of borrowing, why is printing currency a less expensive option for the government than issuing bonds?
Government Financing Decision
Government Financing Methods
When a government prints new physical currency to pay for its expenditures, it is essentially borrowing from the public at a zero interest rate, making this a completely cost-free method of government financing.