1. because people have to give real goods to the government to maintain their desired level of real money holdings in the face of ongoing inflation.
2. because, to make a given real expenditure, the government has to take the same amount of resources from the private sector whether it does it by conventional taxation or by printing money.
3. for both of the above reasons.
4. for neither of the above reasons.
Choose the correct option.
Option 3 is the correct one. The government prints money and uses it to buy goods and services. This causes the price level to rise in the same proportion as the nominal money stock increases. The public has thus given real goods to the government in return for money whose value is wiped out by the resulting increase in the price level. A given level of government expenditure arises from the production of a corresponding level of government services for the public's benefit. The government has to obtain from the private sector the labour and capital resources required to produce these government services. The amount of resources it will need will be the same whether it obtains them by taxing or borrowing from the public or by printing additional money.