Government budget deficits can be inflationary in the long run only if they

Question

Quizplus · Accepted Answer

Government budget deficits may lead to inflation in the long run if they are accompanied by rapid growth in the monetary base, which can lead to an increase in the money supply and higher aggregate demand. This can cause an upward pressure on prices and inflation. However, large cuts in personal income tax rates or increases in defense spending may have other economic effects, but they are not directly related to the potential inflationary impact of government budget deficits. A leftward shift in the SRAS curve, which leads to a decrease in aggregate supply, would also tend to increase prices and inflation in the short run, but it is not a direct consequence of government budget deficits.

Government Budget Deficits Can Be Inflationary in the Long Run