Q. Regarding deficit financing,which of the following statements is/are correct?
Select the correct answer using the codes given below:
Q. Regarding deficit financing,which of the following statements is/are correct?
Select the correct answer using the codes given below:
The correct option is D 1 and 3
Explanation:
Statement 1 is correct:
- Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure revenue gap is financed by either printing of currency or through borrowing. In developed countries, deficit financing is made to boost effective demand. The technique of deficit financing may be used to promote economic development in several ways.
- In developed countries, deficit financing is made to boost effective demand. But in LDCs, deficit financing is made for the mobilization of savings. Savings thus collected encourages increased capital.
- The technique of deficit financing results in an increase in government expenditure which produces a favorable multiplier effect on national income, saving, employment, etc.
Statement 2 is incorrect: It is said that deficit financing is inherently inflationary. When the economy is fully employed, the increased money supply increases aggregate money income through the multiplier effect. As there are no excess capacity in the economy, such increased money income results in an increased aggregate expenditure thereby fuelling an inflationary rise in prices.
Statement 3 is correct: It is said that deficit financing tends to widen income inequality. This is because of the fact that it creates excess purchasing power. But due to inelasticity in the supply of essential goods, the excess purchasing power of the general public acts as an incentive to price rise. During inflation, it is said that the rich become richer and the poor become poorer. Thus, social injustice becomes prominent.
Explanation:
Statement 1 is correct:
- Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure revenue gap is financed by either printing of currency or through borrowing. In developed countries, deficit financing is made to boost effective demand. The technique of deficit financing may be used to promote economic development in several ways.
- In developed countries, deficit financing is made to boost effective demand. But in LDCs, deficit financing is made for the mobilization of savings. Savings thus collected encourages increased capital.
- The technique of deficit financing results in an increase in government expenditure which produces a favorable multiplier effect on national income, saving, employment, etc.
Statement 2 is incorrect: It is said that deficit financing is inherently inflationary. When the economy is fully employed, the increased money supply increases aggregate money income through the multiplier effect. As there are no excess capacity in the economy, such increased money income results in an increased aggregate expenditure thereby fuelling an inflationary rise in prices.
Statement 3 is correct: It is said that deficit financing tends to widen income inequality. This is because of the fact that it creates excess purchasing power. But due to inelasticity in the supply of essential goods, the excess purchasing power of the general public acts as an incentive to price rise. During inflation, it is said that the rich become richer and the poor become poorer. Thus, social injustice becomes prominent.
