<p>You are more or less correct. In a simple IS-LM textbook Macroeconomic model (eg see Blanchard et al Macroeconomics 2nd edition ch3-5), assuming all taxes government raises are lump-sum taxes, this would be correct.</p>
<p>If there is positive and simultaneous negative fiscal shocks such that the IS curve doesn’t move (note depending on parameters of an economy taxes do not necessarily have to raise 1:1 with spending for this to happen), then there is no inflation.</p>
<p>However, in a richer set of models there would be some inflation. Lump-sum taxes are extremely rare, most governments raise revenue primarily though income taxes and sales/VAT taxes. Both of these taxes are distortionary. To the extent that this distortions shift long-run supply to the left (e.g. people substituting leisure for work if income taxes get too high and so on), this would still lead to higher price level, and hence to some inflation (at least in short run assuming no other changes).</p>

CC BY-SA 4.0
2024-12-23T01:33:20.187Z
2024-12-23T01:33:20.187Z
1muflon1
<p>I have been hearing a lot from friends that large amounts of government expenses leads to inflation. However, I disagree assuming that the Federal Reserve is not supporting this spending my buying US Government bonds with newly created money. If the increased spending is  paid for by increased taxes, then the inflationary impact of the spending should be offset by the tax increases. My friends disagree.</p>
<p>Who is right?</p>

<inflation><federal-reserve><united-states>
Government Spending and Inflation
Bob
# Government Spending and Inflation

(Asked by: username_0 on 2024-12-22)

I have been hearing a lot from friends that large amounts of government expenses leads to inflation. However, I disagree assuming that the Federal Reserve is not supporting this spending my buying US Government bonds with newly created money. If the increased spending is paid for by increased taxes, then the inflationary impact of the spending should be offset by the tax increases. My friends disagree.

Who is right?

**Tags:** inflation, federal-reserve, united-states


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## 1 answers

### Answer by username_1 on 2024-12-23. Score: 0 | Accepted answer

You are more or less correct. In a simple IS-LM textbook Macroeconomic model (eg see Blanchard et al Macroeconomics 2nd edition ch3-5), assuming all taxes government raises are lump-sum taxes, this would be correct.

If there is positive and simultaneous negative fiscal shocks such that the IS curve doesn’t move (note depending on parameters of an economy taxes do not necessarily have to raise 1:1 with spending for this to happen), then there is no inflation.

However, in a richer set of models there would be some inflation. Lump-sum taxes are extremely rare, most governments raise revenue primarily though income taxes and sales/VAT taxes. Both of these taxes are distortionary. To the extent that this distortions shift long-run supply to the left (e.g. people substituting leisure for work if income taxes get too high and so on), this would still lead to higher price level, and hence to some inflation (at least in short run assuming no other changes).


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