How do government budget deficits lead to inflation?

1 Answer
Jun 7, 2015

inflation is the steady increase in the general price over a period of time, usually one(1) year.

There can be two ways n which inflation is experienced in an economy, being the cost push (where companies, producers experience high production costs and thus increase the selling price) and demand pull (where an increased rate of income causes a further increase in the demand of goods and services, at constant supply).

Government budget deficit occurs the government expenditure exceeds the government revenue.

When the government revenue is under pressure, the government will make use of their Fiscal policy measures to counteract the deficit through tax rates increase. Tax being the main government revenue stream.

The supply side of the economy, producers, experience an increased cost through increased taxes, this makes producing difficult, the producer, does not incur the cost alone, it is passed to the consumer by adding the increased average cost into the selling price, thus the increase in the general price occurring.