... spending by £100m then it requires to finance this deficit and can do so in 2 ways Increase the stock of bonds by ?Bt Increase the nominal money stock by ?Mst Note. If the increase in spending is permanent the state will require to find £100m each and every year. This implies either or both A rising debt-GDP ratio A rising nominal money stock Note. If the government funds it's deficit via bond sales, it will also require to raise additional capital to service the annual interest payments if it wishes to maintain a permanent nominal spend of £100m . Suppose r=10%. In year 2, the govt will require to raise not only £100m but also 10% of £100m. In total, the government needs to raise £110m in year 2 to maintain it's deficit spend of £100m on public spending programmes. In year 3, the govt will require to raise £100m(1+r)2 = £100m (0.1)2 = £121m. ...

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