The Goal of A Central Bank in Relation to Deficit Financing

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The Goal of A Central Bank in Relation to Deficit Financing
gholamreza soleimani, Member, Management Consultant, Iran

The Goal of A Central Bank in Relation to Deficit Financing.

First of all, let me explain you about what is the deficit financing as follows:
1) In Macroeconomics: Planned expenditure by a government to put more money into the economy than it takes out by taxation, with the expectation that increase business activity will bring enough additional revenue to cover the shortfall. The term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. Critics of deficit financing regularly denounce it as an example of short-sighted government policy. Advocates argue that it can be used successfully in response to a recession or depression, proposing that the ideal of an annually balanced budget should give way to that of a budget balanced over the span of a business cycle.

2) In Microeconomics: Debt financing to cover excess of expenditure over income
Deficit financing, however, may also result from government inefficiency, reflecting widespread tax evasion or wasteful spending rather than the operation of a planned countercyclical policy. The use of deficit financing to maintain total spending or effective demand was an important discovery of the economic depression of 1930. Today it is a major instrument in the bands of government to ensure high levels of economic activity. The definition of deficit financing is likely to vary with the purpose for which such a definition is needed.
In under-developed countries deficit financing may be in two forms:

a) Difference between overall revenue receipts and expenditure
b) Deficit financing may be equal to borrowing from the banking system of the country.
Deficit financing is needed when government expenditures are more than government incomes. Then to overcome the gap the government borrows the money from:

(1) The local bodies

(2) The Reserve Bank

(3) The neighbouring countries

(4) All the above

Deficit financing means increasing the amount of money in circulation at a given time by printing and pumping in more paper currency by the Government of a country.
The decision to create a deficit is made to stimulate an economy by increasing consumer purchasing and at the same time to create more jobs.

Forms of deficit financing
• Seigniorage, the benefit from printing money

• Borrowing money from the population or from abroad

• Consumption of fiscal reserves

• Sale of fixed assets (e.g., land)

The most important goal of a Central Bank in related with deficit financing is...

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