Question

A standard criticism of budget deficits is that they:

Options

• Make cash transfers less efficient than food subsidies

• Are inflationary

• Always reduce the output of the economy

• Reduce the government's interest payments

Answer 1

A criticism of deficits is that they are inflationary. However, this criticism need not hold when the economy has unutilised resources, since deficit spending can then increase output rather than only raising prices.