| What are the effects of a fiscal deficit in the budget on the economy of a country? |
| 1. It increases the rate of inflation. |
| 2. It can lead to depreciation of the country's currency. |
| 3. A level of fiscal deficit at 3% of GDP is considered good for the economy. |
| Select the correct answer using the codes given below. |
A) 1 and 2
B) Only 3
C) All of these
D) None of these
Correct Answer: C
Solution :
[c] Fiscal deficit in the budget refers to the net borrowings of the government to finance the difference between revenue and expenditure. Since borrowings lead to addition of money supply in the economy, it leads increased demand and thus increased inflation. Fiscal deficit leads to depreciation of the currency in two ways, firstly, by increasing the supply of the domestic currency and secondly, by increasing demand for imports which leads to increased current account deficit and thus depreciation. A level of fiscal deficit at 3% of GDP is considered as good for the economy as it can be used to increase the productive capacity of the economy through the borrowing, which can be easily repaid later on through the increased future revenues.
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