When a government finances a deficit by creating new money, the most immediate macroeconomic concern is:
Correct answer: A. Inflationary pressure from excess monetary demand
- A. Inflationary pressure from excess monetary demand
- B. A guaranteed fall in the money supply
- C. An automatic increase in real wages
- D. A complete elimination of public debt
Explanation
Money-financed deficits can increase the money supply and aggregate demand, especially when the economy is near full capacity. If output cannot expand sufficiently, the additional demand creates inflationary pressure.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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