Are fiscal
deficits inflationary?
Are fiscal deficits inflationary?
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 able to 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 underutilised (due to
insufficient demand) and output is below full employment level, then
with the increase in government expenditure, more factor resources
will be employed 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.
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 able to 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 underutilised (due to insufficient demand) and output is below full employment level, then with the increase in government expenditure, more factor resources will be employed 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.
