Question

How is deficit financing responsible for inflation?

Answer 1

Deficit financing is responsible for inflation, as deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the danger of inflation looms large. This is particularly true when deficit financing is made for the persecution of war.

This method of financing during war­time is totally unproductive since it neither adds to society’s stock of wealth nor enables a society to enlarge its production capacity. The end result is hyperinflation. On the contrary, resources mobilized through deficit financing get diverted from civil to military production, thereby leading to a shortage of consumer goods. Anyway, additional money thus created fuels the inflationary fire.