PSNCR Theories - PSNCR and the Money Supply - The effect of borrowing on the money supply

If the PSNCR is high, this means that the government is spending much more than it is receiving in tax revenue. It follows then that it is putting more money into the banking system (from its spending) than it is taking out of it (from taxes). This will increase the money supply in the economy. This may be undesirable as many economists believe that excessive money supply growth will cause inflation. This is a view held particularly by Monetarist economists and Classical economists.

The aim of governments should therefore be to keep the value of the PSNCR down to help keep money supply growth down.