ECONOMICS
INFLATION
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
a. inflation is uncommon because they cannot finance budget deficits by issuing bonds.
|
|
|
b. inflation is uncommon because government expenditures must be financed with taxes and/or user fees.
|
|
|
c. budget deficits will tend to be inflationary.
|
|
|
both (a) and (b) of the above.
|
Detailed explanation-1: -The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.
Detailed explanation-2: -Deficit budgets are better suited for developing economies. Whenever there is a recession, a deficit budget will help in generating employment and boost the economy. If there is a surplus budget then it could indicate that the country is economically highly developed.
Detailed explanation-3: -Yes. If a fiscal deficit is financed by issuing new currency, it will increase inflation. It may be worsened if the new currency is used to finance the current consumption expenditure of the government.
Detailed explanation-4: -A deficit occurs when the federal government’s spending exceeds its revenues. The federal government has spent $460 billion more than it has collected in fiscal year (FY) 2023, resulting in a national deficit.