General Knowledge - Indian Economy - Discussion

Discussion :: Indian Economy - Indian Economy (Q.No.10)


Deficit financing leads to inflation in general, but it can be checked if

[A]. government expenditure leads to increase in the aggregate supply in ratio of aggregate demand
[B]. only aggregate demand is increased
[C]. all the expenditure is denoted national debt payment only
[D]. All of the above

Answer: Option D


No answer description available for this question.

Puneet said: (Oct 8, 2011)  
What is deficit financing?

Shanti said: (Oct 24, 2011)  
The definition of deficit financing is likely to vary with the purpose for which such a definition is needed.

In one sense by deficit financing we mean the excess of government expenditure over its normal receipts raised by taxes, fees, and other sources. In this definition such expenditure whether obtained through borrowing or from the banking system measures the budget deficit.Deficit financing is said to have been used whenever government expenditure exceeds its receipts.

In under-developed countries deficit financing may be in two forms:

a) Difference between overall revenue receipts and expenditure
b) Deficit financing may be equal to borrowing from the banking system of the country.

Ari said: (Dec 16, 2011)  
Shanti thanks for your explanation.

Karna Prasad said: (Jan 25, 2012)  
Answer A is understable. But Answers B and C are not convincing.

Naresh Kumar Kadali said: (Dec 23, 2012)  
Thanks for the clear explanation.

Economics_Lover said: (May 2, 2013)  
Why B?

Due to deficit financing aggregate demand will raise so the government needs to increase the aggregate supply to avoid inflation. So why only aggregate demand will increase?

Rubina said: (May 12, 2013)  
Aggregate demand includes demand of all divisions combined for entire year. So, it is obvious that demand of every sector increase as compared with previous year in order to improve the output.

Rahul said: (Jun 21, 2013)  
If demand of every sector increases then how the output will improve and thus how the inflation will go down ?

I think answer should be A only.

Ashu said: (Jul 12, 2013)  
How increase in aggregate demand curb inflation when aggregate supply does not increases?

Jassi said: (Feb 1, 2014)  
Only aggregate demand will lead to further inflation. Answer should be from what is apparent and conditions should not be considered if they are not given.

Answer should be (A).

Ravi said: (Mar 28, 2014)  
Option(C) is also understandable!

If all the government expenditure goes to pay for it's loans then there is no increase in the aggregate demand right?

(Considering that the loans are taken from large banks and foreign institutions....not domestic bondholders).

Sujit said: (May 20, 2014)  
As per my view answer should be A. Because if supply increases sufficiently than demand, then only inflation can be checked.

Abhay said: (Aug 25, 2014)  
Why b is included ?

Vikas said: (Dec 30, 2014)  
Guys answer A is write because deficit financing is process in which RBI prints more notes when govt has shortage of fund or money its just like more of money in market that leads inflation raise in general price level.

But price arises because people have more of money than they had. So they are demanding more of goods and services. But govt can check inflation if it would be able to produce the goods in same ratio by demand has increased but this impossible in short run because monetary effects in an economy are instant i.e. Inflation will rise definitely in short run.

M K Pattnaik said: (Apr 3, 2016)  
Answer should be option A.

Ainup said: (Jun 4, 2016)  
The answer should be A, the other options are not convincing from question's point of view.

Sushma said: (Oct 27, 2016)  
On what basis RBI prints the currency notes?

Rashmi said: (May 29, 2017)  
Answer should be A only.

Pardeep Kaur said: (Jan 21, 2018)  
I think answer should be A.

Sahadev Mili said: (Jul 20, 2018)  
The answer should be A.

Rivesh said: (May 10, 2020)  
Thanks all for sharing the information.

Sahil said: (Jun 7, 2020)  
The correct Answer is A, other options are incorrect because if you want to counter inflation at a time with deficit financing, the best way is to have shift in Aggregate supply curve to counter the rise in inflation. Other options are incorrect and will only increase inflation.

Jyothsna said: (Sep 18, 2020)  
What is an aggregate demand?

Jayaram said: (Feb 12, 2021)  
Options A, B, C satisfying because in the question "deficit financing leads to inflation in general"mentioned which means in general inflation occurred due to deficit.

Post your comments here:

Name *:

Email   : (optional)

» Your comments will be displayed only after manual approval.