Question

In: Economics

Sustained inflation can result from government budget deficits whether or not the deficits are persistent and...

Sustained inflation can result from government budget deficits

whether or not the deficits are persistent and whether or not the deficits are financed only by an increase in government bond holdings by the public.

whether or not the deficits are persistent, but only if the deficits are financed at least in part by money creation.

only if deficits are persistent, but whether or not the deficits are financed by an increase in government bond holdings by the public.

only if deficits are persistent and financed at least in part by money creation.

Solutions

Expert Solution

Sustained inflation can result from government budget deficits only if deficits are persistent and financed at least in part by money creation.

Explanation: From quantity theory of money equation (MV = PY), for sustained inflation to occur, there must be sustained higher growth of money supply than growth in real output. This high rate of inrease in money supply can occur due to persistent fiscal deficits which are at least partly financed by money creation.

Rahul Sunny answered 2 years ago
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