What is the relationship between debt intolerance and the inflation ta

What is the relationship between debt intolerance and the inflation tax?

What will be an ideal response?

ANSWER

A government that is unable to borrow (at a reasonable cost) is likely to resort to selling its debt to the central bank, raising the money supply and inflation. As the price level rises, the real seignorage falls, so that a constant budget deficit requires an ever larger growth rate of the money supply and acceleration of inflation. This phenomenon helps to explain how creditors become intolerant of the government’s debt in the first place.