Question

How does a deficit budget affect the economy?

• A. The economy comes out of recession
• B. More quantity of money flows into the economy
• C. More investment will be in the economy
• D. All of these

Hint:

A deficit budget can act as a stimulus, injecting money into the economy, stimulating demand, and potentially lifting the economy out of a recession.

Answer 1

The Correct Option is D

Step 1: Understanding a Deficit Budget:
A deficit budget occurs when the government's expenditure exceeds its revenue receipts, leading to a fiscal deficit. The government may fund this deficit by borrowing, printing more money, or through other financial instruments. A deficit budget often stimulates economic activity, particularly in times of recession or economic slowdown. Step 2: Analyzing the Effects on the Economy:
- Option (A) The economy comes out of recession: A deficit budget can help pull an economy out of recession by stimulating demand. Increased government spending on infrastructure, social services, and other sectors boosts demand for goods and services. This can help revive economic growth by addressing the demand-side constraints during a recession.
- Option (B) More quantity of money flows into the economy: A deficit budget can lead to an increase in the money supply if the government borrows from the central bank or prints more money to finance its deficit. This increase in money circulation can help boost liquidity in the economy, leading to increased consumption and investment.
- Option (C) More investment will be in the economy: Government spending, especially on infrastructure projects and public investments, can stimulate private sector investment. Businesses may become more confident in the economy, leading to higher private investment levels.
- Option (D) All of these: Since a deficit budget is designed to inject money into the economy, stimulate demand, and support economic growth, all of these effects are likely to occur simultaneously.
Step 3: Conclusion and Answer:
The correct answer is (D) because all of the mentioned effects can occur due to a deficit budget, especially when the economy is in recession and requires stimulus to revive economic activity.