Chapter 16.3, Problem 4R

To determine

To evaluate the how national debt is affected by the deficit financing?

Explanation of Solution

National debt is a central government 's cumulative unpaid borrowing, consisting of internal debt (which is due to domestic creditors) and external debt (which is due to international creditors), incurred in funding its spending.

The temporary arrangement of the money to cover its excess revenue by printing more currency generally known as deficit financing but deficit financing will lead to inflation, because deficit financing raises people's money supply and buying power, leading to consumer price rises.

Therefore all deficits have the effect of rising the economy's future capital resources. the danger would be inflation rather than capital reduction.

Economics Concept Introduction

Introduction: Financing deficit means raising funds to finance the debt that results from excess spending over revenue. The difference is filled by borrowing from the public by either selling bonds or printing out new money.