"Fiscal deficit is necessarily inflationary in nature''. Do you agree? Support your answer with valid reasons.

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Solution

The term 'Fiscal Deficit' is the difference between the government's total expenditure and its total receipts (excluding borrowing). Such borrowings are generally financed by issuing new currency which may lead to inflation. However, if the borrowings are for infrastructure! development, this may lead to capacity building and may not be inflationary.

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