Under a fiat monetary system, the absence of currency convertibility means
Answer: (b) by imposing a fine on anyone who has a red car, the government can motivate red car owners to offer goods and services in return for public spending.
The answer is by imposing a fine on anyone who has a red car, the government can motivate red car owners to offer goods and services in return for public spending.
In a fiat monetary system the currency has no intrinsic worth. Further the government has no intrinsic financial constraint. Once we realise that government spending is not revenue-constrained then we have to analyse the functions of taxation in a different light. The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government's economic and social program.
The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.
It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).
Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn't desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.
The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
So the point is that for a fiat currency to be used in an economy, people in the non-government sector have to have a motive to get hold of it. The imposition of a tax obligation that can only be extinguished in the fiat unit of account provides that motive.
However, the government could impose any obligation, which could only be met by people in the non-government sector by acquiring the fiat currency and returning it to the government.
The fine would be one alternative to taxation to accomplish a "demand" for the particular fiat currency. Once people have to get hold of that currency they will willingly exchange goods and services in return for public spending.
Obviously, in this stupid tax regime, everyone would quickly trade out of red cars!
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