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Chapter 20: Q 6. (page 547)

“Persistent budget deficits always lead to higher inflation.” Is this statement true, false, or uncertain? Explain your answer

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Step 1. Define budget deficit.

A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country.

02

Step 2. Explanation

Inflation rises only when the shortfall is supplied by money creation. It broadens the monetary base and expands the supply of money. There will be no rise in the monetary supply if the Fed employs bonds to boost public bond holdings.

So, the statement is false.

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Most popular questions from this chapter

Both the portfolio choice and Keynes’s theories of the demand for money suggest that as the relative expected return on money falls, demand for it will fall. Why does the portfolio choice approach predict that money demand is affected by changes in interest rates? Why did Keynes think that money demand is affected by changes in interest rates?

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