Question

Which of the following is a danger from fiscal deficit?

• A. Deflationary pressure
• B. Inflationary pressure
• C. Both (A) and (B)
• D. None of these

Hint:

A fiscal deficit can lead to inflationary pressure as it increases the government’s borrowing and potentially increases the money supply in the economy.

Answer 1

The Correct Option is B

Step 1: Understanding Fiscal Deficit:
A fiscal deficit occurs when the government’s total expenditure exceeds its total revenue (excluding borrowings). It indicates the total borrowing requirements of the government. A high fiscal deficit can lead to several economic consequences, depending on how it is managed.
Step 2: Analyzing the Options:
- Option (A) Deflationary pressure: A fiscal deficit does not directly cause deflationary pressure. In fact, if the government borrows heavily and spends more, it can lead to inflationary pressure. Deflation usually occurs when there is a reduction in aggregate demand.
- Option (B) Inflationary pressure: This is the correct answer. When the government runs a fiscal deficit, it may need to borrow money from the central bank, leading to an increase in the money supply. This increase in money supply can result in inflationary pressure.
- Option (C) Both (A) and (B): This is incorrect because fiscal deficit is typically associated with inflationary pressure, not deflationary pressure.
- Option (D) None of these: This is incorrect since inflationary pressure is indeed a potential danger from fiscal deficit.
Step 3: Conclusion and Answer:
The correct answer is (B) because a fiscal deficit can lead to inflationary pressure due to the increase in the money supply and government borrowing.