Hi, How is budget deficit related to inflation? Ie. Reducing budget deficit reduces GDP growth… Why? Thanks
It means government is borrowing to spend. When it spends it pushes prices higher. This is especially true when the economy is at or near full emplyment.
I would have said because the government is reducing the budget deficit, its essentially tightening its belt, less spending, maybe tax hikes, less borrowing if possible, therefore this should have a negative effect on GDP growth and inflation, ignoring the monetary side of things
pedpenny, yes you are right. It depends on whether the government is reducing the deficit (like you said) which leads to less GDP and less inflation, or whether it is increasing the deficit by borrowing and spending, which leads to more GDP and more inflation.
Got it. Many thanks to you both!