Are fiscal deficits necessarily inflationary?

1.	Are fiscal deficits necessarily inflationary?
Answer» Fiscal deficits are generally treated as inflationary. Increase in govt, expenditure and cuts in taxes both leads to government deficit. Increased govt, expenditure and reduced taxes tend to increase the aggregate demand. Generally firms are not able to produce higher quantities that are demanded at the going prices. This leads to inflationary pressure. However, there is a solution to this inflationary pressure. Economy can utilizatfle unutilized resources and raise production. Therefore, the deficit cannot be inflationary when an economy has unutilized the resources.

Answer»

Fiscal deficits are generally treated as inflationary. Increase in govt, expenditure and cuts in taxes both leads to government deficit. Increased govt, expenditure and reduced taxes tend to increase the aggregate demand. Generally firms are not able to produce higher quantities that are demanded at the going prices.

This leads to inflationary pressure. However, there is a solution to this inflationary pressure. Economy can utilizatfle unutilized resources and raise production. Therefore, the deficit cannot be inflationary when an economy has unutilized the resources.

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