"Government across nations are too much worried about the term fiscal deficit".Do you think that fiscal deficit is necessary infaltionary in nature? support your answer with valid reasons.
Answers
Answer:
Fiscal deficits are not necessarily inflationary; though they are generally regarded as inflationary. When the government expenditure increases and tax reduces there is a government deficit and there will be a corresponding increase in the Aggregate Demand. However the firms might not be meet the growing demands forcing the price to rise. Hence fiscal deficits are inflationary in this sense.But on the other hand initially if the resources are underutilized due to insufficient demand and output is below full employment level then with the increase in government expenditure more factor resources will be employment to cater to the increasing demand without exerting much pressure on price to rise. In this situation a high fiscal deficit is accompanied by high demand greater output level and lesser inflationary situation. Hence whether the fiscal deficits are inflationary or not depends on how close is the original output level to the full employment level.