What is the effect of deficit financing on economy is increase in money supply?
Answers
Explanation:
There are some situations when deficit financing becomes absolutely essential. In other words, there are various purposes of deficit financing.
To finance war-cost during the Second World War, massive deficit financing was made. Being war expenditure, it was construed as an unproductive expenditure during 1939-45. However, Keynesian economists do not like to use deficit financing to meet defence expenditures during war period. It can be used for developmental purposes too.
ADVERTISEMENTS:
Developing countries aim at achieving higher economic growth. A higher economic growth requires finances. But private sector is shy of making huge expenditure. Therefore, the responsibility of drawing financial resources to finance economic development rests on the government. Taxes are one of such instruments of raising resources.
Answer:
It helps in increasing money supply since it is promoting poor people to open bank accounts. By opening accounts , they'll keep at least some money which would have else been at their houses being unproductive. But once their money reaches the bank it is used for investments or other purposes which increases the flow of money in the economy.