Question

Discuss the effects of public expenditure on inflation.

Answer 1

1. Inflationary Impact: If government spending increases aggregate demand faster than supply, it can lead to demand-pull inflation.
2. Deficit Financing Risk: Financing public expenditure by printing money or borrowing can raise the money supply, causing inflation.
3. Anti-inflationary in the Long Run: Productive spending increases the supply of goods and services, helping to control inflation in the long term.