0
How can deficit financing policy can cause inflation in Pakistan?
Wiki User
∙ 12y ago
Deficit Financing is a tool with Government to finance development and non development expenditures by printing currency notes. Due to the Government spending the extra currency notes come in circulation in economy. Since total amount of goods and services in the economy remain the same rather people get addition money to buy the goods and services. Due to the effect of demand pull inflation the prices of goods and services in the economy rises and is main source of inflation.
Wiki User
∙ 12y ago
Add your answer:
Earn +20 pts
Can Financing expansionary fiscal policy by increasing the deficit does not generally affect interest rates or inflation?
Expansionary fiscal policy or running the printing presses usually causes inflation. Sometimes it causes hyperinflation. It caused both the inflation and interest rate to rise to 20% under the Carter administration.
What has the author Robert E Weintraub written?
Robert E. Weintraub has written: 'International lending by U.S. banks' -- subject(s): American Loans, Monetary policy 'Deficits' -- subject(s): Deficit financing, Economic conditions, Inflation (Finance)
What has the author Nii Kwaku Sowa written?
Nii Kwaku Sowa has written: 'Policy consistency and inflation in Ghana' -- subject(s): Inflation (Finance), Fiscal policy 'Inflation management in Ghana' -- subject(s): Inflation (Finance), Monetary policy 'Impact of liberalization on key markets in sub-Saharan Africa' -- subject(s): Economic policy, Free enterprise, Free trade, Structural adjustment (Economic policy) 'The wider macroeconomic implications of fiscal policy' -- subject(s): Deficit financing, Fiscal policy 'Inflation, interest rates, and banking in Ghana' -- subject(s): Effect of inflation on, Banks and banking, Interest rates 'Macroeconomic management and exchange rate policies in Ghana' -- subject(s): Foreign exchange rates, Monetary policy
What has the author C N Vakil written?
C. N. Vakil has written: 'The future of the rupee' -- subject(s): Currency question 'Poverty and planning' -- subject(s): Economic policy, Economic conditions 'Economic relations between India and Pakistan' -- subject(s): Foreign economic relations 'Deficit financing and inflation' -- subject(s): Inflation (Finance), Deficit financing 'Industrial development of India: policy and problems' -- subject(s): Industrial policy 'Growth of trade and industry in modern India' -- subject(s): Industries, Commerce 'Planning for a shortage economy' -- subject(s): Economic policy 'Government and the governed' -- subject(s): Social conditions, Social surveys 'Financial developments in modern India, 1860-1924' -- subject(s): Finance, Finance, Public, History, Public Finance, Taxation 'Poverty, planning, and inflation' -- subject(s): Economic policy, Economic conditions 'Finance under provincial autonomy' -- subject(s): Taxation, Finance 'Economic outlook in federal India' -- subject(s): Politics and government, Economic conditions
What effect did fords economic policy have fallen n the economy?
Inflation went down due to spending cuts, but unemployment remained high under Ford's economic policy.
What should be a future effect upon the economy if a expansionary fiscal policy continues in an economy with an increasing budget deficit and growing national debt?
high inflation
What is the role of deficit financing on economic growth?
Deficit financingDeficit financing is the practice of a network or channel paying the studio that creates a show a license fee in exchange for the right to air the show. A major broadcast network will ask a program producer to share in the financial risk when considering adopting a new program to its schedule; at least for the first season of the series. The deficit is essentially the network not paying the full total of the cost to create a pilot program or of the cost of creating episodes of a new program. Deficit financing also helps to minimize the substantial risks and costs of developing programs for the networks and gives studios initial benefits as well. The studio bears the difference between production costs and licensing fees, but recoups significantly more money if the show is sold in syndication. If the network orders enough episodes of a show, the studio can then sell the series to other markets. Deficit financing minimizes risks and costs of developing programs for networks. [6]The impact of deficit financing on pricesIndia resorted to deficit financing, then largely financed through Reserve Bank's books either by printing more money or use of its foreign exchange reserves, right from the early years of planned economic development. However, our planners did not factor in the impact of deficit financing on inflation. But with large foreign exchange reserves, they were confident of the government's ability to manage the supply-side of the economy.For much of the 1950s, the Bank was part of this consensus. Although the impact of deficit financing on prices had aroused concern already in 1951-52 , price stability did not return as a major cause of worry at the Bank until the mid-50 s. Besides, the Bank recognised the need for any plan to go beyond what available resources dictated, even if some part of the additional investment had to be financed through additions to money supply.Ironically, despite the first plan document, highlighting the important role of the central bank, the Reserve Bank also took a rather modest and self-effacing view about its own part in the planning process during these years, insisting that while it was entitled to be consulted by the government regarding the dimensions of the plan effort, the final decisions rested with the latter.One of the volumes of RBI's history notes that the central bank was not given sufficient time to consider the first Five-Year Plan, the plan document arriving in Bombay only towards the close of October 1952. Any contribution the Bank made to the first plan document appears to have been cosmetic , rather than substantial, with the Governor B Rama Rau, for instance, choosing merely to object to the plan document's suggestion that 'real democracy' implied the 'equality of incomes' .But in the mid-50 s, the central bank started warning the government about the impact of deficit financing on inflation. In the last 15 years, with India adopting a more market-driven approach todevelopment, and even the concept of deficit now not including monetisation, the central bank still continues to warn the government over the dangers of high fiscal deficit on the conduct of monetary policy.Government deficits: good or bad? Whether government deficits are good or bad cannot be decided without examining the specifics. Just as with borrowing by individuals or businesses, it can be good or bad. If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self-defense, or spends on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary. If, on the other hand, the deficit finances wasteful expenditure or current consumption, most would recommend tax cuts to stimulate private investment, transfer cuts, and/or cuts in government purchases to balance the budget.DEFICIT FINANCING AND DEVELOPING COUNTRIES :-In the developing countries capital resources are inadequate for financing the economic development. The rate of taxes can not be increased because the rate of saving and consumption will fall. The rate of saving is already very low in the less developing countries due to low per capita income. So government adopts the deficit financing policy to break the vicious circle of poverty. The main reasons for using this policy are as under :1. To Cover the Gap :-When the Govt. is unable to fill the gap between the total receipts and total expenditure by imposing taxes then Govt. adopts the policy of deficit financing. By adopting this way Govt. can avoid the displeasure of the people.2. Low Savings :-In the under developed countries normally rate of savings is 10% to 14% of the GNP which is very low. As such the Govt. of these countries is compelled to use this policy as an instruments for economic development.3. Rapid Growth of Population :-In the less developed countries population growth is very high. To met the needs of the people and to speed up the economic development Govt. is using the deficit financing policy.4. Lack of Banking Facilities :-Savings are mobilized by the financing institutions. But in the underdeveloped countries there is a shortage of these institutions particularly in rural areas. So resources are not mobilized to the desired extent and Govt. is helpless to use this policy.ADVANTAGES OF DEFICIT FINANCING :-Following are the important advantages of deficit financing :1. High level of employment is ensured by the policy of deficit financing.2. Utilized and underutilized resources can be build up with the help of this policy.3. Additional resources can be mobilized for the economic development by using this policy.4. Social and economic over heads can be build up by adopting the policy of deficit financing.EFFECTS OF DEFICIT FINANCING :-When the government expenditure financed by the created money, it leads to inflation in the country. The classical economists say that in a capitalistic economy there is always a tendency for the economy to operate at the level of full employment.When there is full employment and we use this policy the inflation rate will rise.But Prof. Keynes is not agree with them. He says that "When there is large scale of unemployment and the resources of the country are not being fully utilized deficit financing policy is very helpful in improving the economic condition without inflation."Today this policy is commonly used in the all countries. The poor countries are using this policy to utilize their unemployed resources. These countries are using the deficit financing for the construction of roads, railways, canals and factories.There is a time gap between the pumping of money into the hands of the people and the establishment of scheme of development.If the extra demand is increased due to the created money, is matched by the extra supply of goods then prices will not rise. If the time period between input and output is long the prices will rise for the particular time period and economy will face the inflationary pressure. On the other hand if the time is shorter between the consumption and completion of development schemes, then inflationary pressure will be slow.One thing should be noted that the relation between prices and created money may be different. A 100% rise in the money supply may create only 10% rise in the price of the commodity.The rising of prices due to the deficit financing depends upon various factors such as time period, consumption, savings and habits of the people.For example if people hold or save all the created money then there will be no inflationary pressure.HOW TO REDUCE THE INFLATIONARY PRESSURE OF DEFICIT FINANCING :-Deficit financing is very useful weapon for ensuring the high level of employment in the advanced countries. They increase the effective demand and adopt various measures to reduce the inflationary pressure. Following are the important measures which can be adopted to control inflation :1. Formulation of Import and Export Policy :-A country should frame its import and export policy in such a manner that the supply of an essential goods may not fall.2. Proper Allocation Of Resources :-The rise in price due to deficit financing can be controlled by proper allocation of resources. Developing countries should prepare effective plans and resources of the country may not be wasted in unproductive projects.3. Fiscal Policy :-The inflationary pressure can be controlled, if a government increases the rate of taxes on luxuries and introduces the compulsory saving schemes.4. Monetary Policy :-An effective monitory policy can be adopted to reduce the inflationary pressure. Most of developing countries are also using these weapons against the inflationary pressure to reduce the inflation.5. Supply of Commodities :-Inflationary pressure can be controlled by providing the basic goods to the consumer at fixed rates through the utility stores.
Fiscal policy and monetary policy?
fiscal is the governments budget in terms of spending and expenditure. so there can either be a budget deficit or a budget surplus. when there is a budget surplus, government use a contractionary fiscal policy, and when there is a deficit, they use an expansionary fiscal policy. Monetary policy is used to combat an economy growing to quickly and inflation is rising. in most countries this is the Official Cash Rate. There is a tight monetary policy which government can impose if the economy is growing rapidly and this is used to constrict spending within that economy
What has the author Heinz-Dieter Wenzel written?
Heinz-Dieter Wenzel has written: 'Defizitfinanzierung als Instrument einer zielorientierten Finanzpolitik' -- subject(s): Deficit financing, Fiscal policy, Public Debts
How do monetary policy control inflation?
Monetary policy can have an impact of inflation. The ideal state of the economy is a balance between inflation and unemployment at 4.3% which is only seen in a wartime economy.
Aggregate demand in the US is influenced by both inflation and?
Aggregate demand is actually influenced mostly by the nation's monetary policy and fiscal policy, not so much by inflation. Aggregate demand is actually influenced mostly by the nation's monetary policy and fiscal policy, not so much by inflation.
What is called deficit spending?
expansionary fiscal policy position
