Question

Many nations are running a Fiscal Budget Deficit do you consider this a problem? Why or why not? What impact do Central Banks play in this issue?

Answer 1

No, fiscal budget deficit is not always a problem for the economy . As in short run period it creates low rate of taxes and increased government spending due to which there is increase in aggregate demand which results in higher real GDP and higher inflation. But this may create a problem for the government as well as for the economy in the long run period as interest rates are increased to fulffil the deficit.

Central banks play a major role in fiscal budget deficit as they purchase the securities which are issued by the government to finance the fiscal budget deficit and when the private sector purchases these shares from the central banks , then central banks try to limit the interest rate