Consider the following statements about fiscal deficit of the government 1 Financing of deficit may ...........

Economic Affairs Public Finance and Debt Management

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Consider the following statements about fiscal deficit of the government

1. Financing of deficit may cause the crowding out effect of private investment.

2.Borrowing from the RBI to finance the deficit may cause inflation.

3.Market borrowing for deficit financing may alter the money supply.

4.Deficit financing will lead to inflation.

Which of the statements given above is/are correct?

1 and 2 only

2 and 4 only

3 and 4 only

4 only

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Explanation:

Fiscal deficit means Government need to borrow from the market which leads to crowding-out of funding for private players. Withdrawals from cash balance held in RBI and borrowing from RBI leads to increase in money supply. This increase in money supply may lead to rise in prices. Borrowing from public has no effect on money supply in the country. When government borrows, money gets transferred from the public to the government. The net effect on total money supply in the country is nil.

Deficit financing may lead to inflation depending upon the Source of borrowing of deficit financing.