We saw, in part 14, that government spending increases the net financial assets of non-government, whereas taxes do the reverse. The level of net financial assets at a point in time is a stock. The change in net financial assets…

Now that we have introduced ‘government money‘ and ‘commercial bank money‘, we are in a position to understand in basic terms how fiscal policy (government spending and taxing) is conducted and its direct financial effects. At this stage, the treatment…

We have seen that a national currency enters the economy when government spends, and that the recipients of the government spending can use the currency for various purposes, including to purchase goods and services. Government is therefore an original source…

We saw in part 2 that to establish a currency, government needs to do three things: 1. Define a unit of account (e.g. dollar). 2. Impose taxes that can only be paid in that unit of account. 3. Spend or…

Money can be thought of as an IOU (“I owe you”), denominated in a nation’s money of account. The issuer of an IOU can buy goods or services from anybody who is willing to accept the IOU as payment.

It was mentioned (in part 2) that a currency-issuing government issues its currency in the act of spending. An implication of this is that a currency-issuing government does not need income in order to spend. We have also noted (in…

We understand that, as a rule, total spending must equal total income (this was explained in part 4 of the series). But this raises a question. Is it spending that determines income or, instead, income that determines spending?

In part 7, we arrived at a fundamental National Accounting identity: GDP = Total Output = Total Income = Total Spending This identity suggests various ways of measuring GDP.

A prominent flow measure for the economy as a whole is Gross Domestic Product (GDP). This is a measure of the total output produced within the domestic economy over a year.