Question

Which among the following is/are true?
1. Deficit financing does not lead to inflation if adopted in small doses.
2. Deficit financing is an often used tool for financing budgetary deficits.
Select the correct answer using the codes given below.

• A. Only 1
• B. Only 2
• C. Both 1 and 2
• D. None of these

Answer 1

The correct option is C Both 1 and 2

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. Nowadays most governments both in the developed and developing world are having deficit budgets and these deficits are often financed through borrowing. Hence the fiscal deficit is the ideal indicator of deficit financing. Budget deficit is printing money to finance a part of the budget. In India, there is no budget deficit at present Deficit financing may not necessarily be inflationary there are certain conditions under which deficit financing may not lead to inflation. Thus both options are correct.