Are fiscal deficits necessarily inflationary ?

1.	Are fiscal deficits necessarily inflationary ?
Answer» (i) Fiscal deficits are not necessarily inflationary. (ii) As we know Fiscal deficit shows borrowing requirement of the government . (iii) If we borrow when there is situation of underemployment of the economy i.e. in a situation of deficient demand, then it is not inflationary because in situation of deficient demand output is held back because of lack of demand. (iv) A high fiscal deficit is accompanied by higher demand and greater output which is not inflationary . (v) On other hand, if we borrow at the full employment level then it is inflationary in nature. A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater than aggregate supply at the full employment which is always inflationary.

Answer»

(i) Fiscal deficits are not necessarily inflationary.

(ii) As we know Fiscal deficit shows borrowing requirement of the government .

(iii) If we borrow when there is situation of underemployment of the economy i.e. in a situation of deficient demand, then it is not inflationary because in situation of deficient demand output is held back because of lack of demand.

(iv) A high fiscal deficit is accompanied by higher demand and greater output which is not inflationary .

(v) On other hand, if we borrow at the full employment level then it is inflationary in nature.

A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater than aggregate supply at the full employment which is always inflationary.

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