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If large budget deficits cause the public to think that there will be higher inflation in...

If large budget deficits cause the public to think that there will be higher inflation in the future, what is likely happen to the short run aggregate supply curve when budger deficits to rise?

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Answer #1

Budget deficit occurs when the government expenditure is higher than the revenues. A rise in budget deficit implies a rise in the expenditure with lower revenues. Rise in government expenditure leads to increase in productivity as more productive activities take place. Producers are encouraged to undertake more investment. This causes short run aggregate supply curve to shift right. This will  result in a greater real GDP and downward pressure on the price level, if aggregate demand remains unchanged.

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