Are Budget Deficits Inflationary?

VIEW

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

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

NCERT Questions

Question 13

Are fiscal deficits inflationary?

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