General Knowledge - Indian Economy - Discussion

What is deficit financing?

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.

Shanti thanks for your explanation.

Answer A is understable. But Answers B and C are not convincing.

Thanks for the clear explanation.

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?

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.

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.

How increase in aggregate demand curb inflation when aggregate supply does not increases?

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).