Question

Explain two effects of deficit financing.

Answer 1

1. Inflationary Rise in Price: Inflationary price increases could be the outcome of deficit finance. When the money supply rises as a result of deficit financing, consumers have more purchasing power, which raises demand for goods and services. Prices typically rise due to excess demand if there isn't a short-term proportional increase in the total supply of products and services. Before the long-term supply of products and services rises, it might be too late. A cost-price spiral may occur as a result of rising prices driving up costs, which in turn drive up prices.
2. Unequal Impact of Forced Savings: Forced savings may have a greater impact on fixed-income people than on higher-income groups. Because inflation raises the cost of consumer items, persons on fixed incomes such as wages and salaries have less money to save.