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Budget Deficit Cause Increase in Inflation

Budgetary Deficit are caused either due to

Reduction in Taxes

or

Increase in Spending of Govt

 

If Govt Reduces taxes, Disposable income increases

Hence, Demand for product increases

 

In case of increase in spending by govt

Govt will buy more products, so Demand for Product increases

 

Producer will not be able to produce higher demand without increasing prices

Hence, it leads to increase in prices or inflation

How Budgetary Deficit causes inflation - Teachoo.JPG

COUNTERVIEW

Budget does not cause Inflation

Budgetary deficit leads to increase in demand

But Producers have surplus capacity

So they are able to fulfill this demand without increasing prices

Counterview How Budgetary Deficit does not cause inflation - Teachoo.JPG

NCERT Questions

Question 13

Are fiscal deficits inflationary?

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Other Books

Question 1

In the following questions, select the correct answers:

How does Budget deficit cause inflation?

  1. Government increase prices of goods
  2. Budget deficit increases demand which ultimately cause inflation
  3. Government borrows money from IMF
  4. None of the above
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Transcript

How Budgetary Deficit causes inflation? In case of Budgetary Deficit Govt Reduces Taxes Products become cheaper Govt buys more product Govt Increases spending More demand of product Capacity limited of producer Prices of products increase Causes inflation Counterview How Budgetary Deficit does not cause inflation? In case of Budgetary Deficit Reduction in Taxes Increase In govt spending Products become cheaper Govt buys more product Less demand of product Surplus capacity of producer Supply product at same price Does not cause inflation

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.