Opponents of continuous fiscal deficits often agree that short-period of deficit spending is not likely to be inflationary when the private demand is weak. Their main concern is that the accumulated stock of spending associated with continuous fiscal deficits eventually increases the risk of inflation. Their concern has validity.
Answer: False
The answer is False.
This question tests whether you understand that fiscal deficits are just the outcome of two flows which have a finite lifespan. Flows typically feed into stocks (increase or decrease them) and in the case of deficits, under current institutional arrangements, they increase public debt holdings.
There is no "accumulated stock of spending" associated with fiscal deficits. The expenditure impacts of deficit exhaust each period and underpin production and income generation and saving. Aggregate saving is also a flow but can add to stocks of financial assets when stored.
Under current institutional arrangements (where governments unnecessarily issue debt to match its net spending $-for-$) the deficits will also lead to a rise in the stock of public debt outstanding.
But of-course, the increase in debt is not a consequence of any 'financing' imperative for the government. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
This is not to say that in each period the deficit may increase the inflation risk - depending on how fast nominal aggregate demand is growing relative to the real capacity of the economy to respond to it.
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