Inflation tends to increase the size of government budget deficits and the size of the public debt.

Question

Quizplus · Accepted Answer

Inflation can increase government budget deficits because it can raise the cost of goods and services the government purchases, and if tax revenues do not increase at the same pace, deficits can grow. Additionally, inflation can erode the real value of fixed-rate debt, but if the government continues to borrow to finance deficits, the nominal size of the public debt can increase.

Inflation Tends to Increase the Size of Government Budget Deficits