How an Increase in Government Expenditure Gives Rise to Inflation


Added on  2019-09-26

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Question: Why might an increase in government expenditure give rise to inflation?AnswerIntroduction When the general price level of any economy rises, then inflation occurs. The price level mayrise due to many factors like when the companies increase the salaries of the people; the houseowners increase the rent of houses when the price of home rises in the economy. Then, it mayalso rise when the more money start to get printed in the economy by the central bank of thatcountry on the demand of the government and there are various other reasons too. One cause ofinflation is the rise in the expenditure of the government. Whenever the spending by thegovernment of any country rises, the money supply in the economy increases the prices rise andcause inflation. Not only the spending, but the rate of taxes also impacts the rate of inflation inthe country. There are some tools that are government use to control the rate of inflation anddeflation of the country. These tools are the monetary and the fiscal policy that include actionslike CRR, SLR, bank rate, taxes etc. are changed for tackling the problem of inflation (Batstra,2012). During the rise in the general price level, the government restores to contractionary fiscaland monetary policy and vice-versa. With this tool, the supply of the money in the economyfalls and thus the price level comes down and inflation is controlled. It is the part of fiscal policyof the government that it increases or decreases its spending. With this solution or tool, theinflation is caused and controlled as well. This question is important to analyze because there are some economic variables that impact theeconomy’s health and they also influence the policy initiatives by the government. So the1

following analysis will help in explaining that why the inflation is caused when the governmentincrease its spending.The way by which an increase in government expenditure give rise to inflationIt is the responsibility of the government to take care of the economy whenever it faces anyproblem like the problem of inflation or deflation. Basically, the government takes care of itsspending and borrowing so that it can make the economy stay stable and good. When the countryis about to suffer from any crisis, the government takes steps to protect it and make the workingof the country smooth. When the government spends, it is for the stimulation of the economicgrowth of the country. With the rise in the spending of the government, the supply of the moneyin the economy rises and thus inflation is caused. There are various ways in which thegovernment spends in the economy that boosts it and thus the rate of inflation rises. With morespending, the money supply gets pumped in the economy and the inflation increases. When the government spends more, the inflation rises in the following ways:1. With the spending of the government rises and they spend in the job related schemes thataim to create the more jobs for the people, and then the people start to earn more. Withthe more earnings by the people, the purchasing power of the people rise, they startbuying more goods and services in the economy (Hofmann, 2005). When they startbuying more, they demand more, and then the prices of the goods are increased by thecompanies. They do this because they are able to sell more goods at the high prices(Argy, 2016). So, the people in the companies increase price of goods and services, theallover prices of goods and services rise and the inflation occurs in the economy.2

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