Question

Explain how the budget deficit impacts inflation?

Answer 1

• Budget deficit is said to occur when the government spends more than it receives from taxes in the form of revenue.
• When the government spending increases more than the tax revenues, the central bank provides extra funds by increasing the money supply.
• This increases the aggregate demand within the economy.
• Higher aggregate demand increases the level of real GDP within the economy.
• This leads to an increase in the price level throughout the economy, thereby increasing the inflationary pressure.