Which among the following is are true 1 Deficit financing does not lead to inflation if adopte...........

Economic Affairs Public Finance and Debt Management

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Which among the following is/are true?

1. Deficit financing does not lead to inflation if adopted in small doses

2. Deficit financing is an often used tool for financing budgetary deficits

Select the correct answer using the codes given below:

1 Only

2 Only

Both 1 and 2

None of these

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Explanation:

Deficit refers to the difference between expenditure and receipts. In public finance, it means the government is spending more than what it is earning. Government expenditure and revenue can be split into capital and revenue. Deficit financing is a necessary evil in a welfare state as the states often fail to generate tax revenue which is sufficient enough to take care of the expenses of the state. Deficit financing allows the state to undertake activities which, otherwise, would be beyond its financial capacity. The concept was popularised by noted British economist JM Keynes with the aim of pumping a depressed economy.