Question

Which of the following is/are the possible effects of deficit financing?
$1$. Increase in money supply with the public
$2$. The rise in the level of incomes
$3$. The fall in the general price level
Select the correct answer using the code given.

• A. $1$ only
• B. $1$ and $2$
• C. $2$ only
• D. $1,2$ and $3$

Answer 1

The correct option is A $1$ only

Deficit financing seems to present a positive inflationary impact on developing economics. When there is a budget deficit, government finds ways of financing the deficit through borrowing from commercial and merchant banks. This leads to increased supply of money in the economy. The use of deficit financing for the pursuit of fiscal policies often leads to increased danger in an economy.