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                                                                                 Explain the role of government budget in fighting inflationary and deflationary tendencies.

Answer:

Ans.     Government budget is of immense help in fighting the inflationary and deflationary tendencies. To curb the inflationary tendency, the government can prepare a surplus budget. A surplus budget is one in which estimated receipts exceed the estimated expenses. Such a budget reduces the money supply in the economy. With a fall in the money supply, the purchasing power of people also fall, leading to a fall in the level of aggregate demand. As aggregate demand falls, the price level or the rate of inflation also falls. To curb the deflationary tendency, the government can prepare a deficit budget. A deficit budget is one in which estimated expenses exceed the estimated receipts. Such a budget increases the money supply in economy. With increase in money supply, the purchasing power of people also rise, leading to and increases in the level of aggregate demand. As aggregate demand rises, the price level also rises and rate of deflation begins to fall.