Continuous fiscal deficits are more likely to present an inflation risk than one-off deficits designed to meet a short-term private spending decline.
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.
So 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.
The inflation risk is inherent in each period that the deficit runs. The continuous nature doesn't change that. As long as the government is filling a non-government sector spending gap then it can safely run non-inflationary deficits forever.
It may be argued that lobby group capture rises after a long-period of government deficits and this makes it hard for governments to adjust net spending when there are fluctuations in private spending that warrant a cut back in public stimulus.
That might be true but one wouldn't advocate entrenched unemployment to avoid the capture of government by lobby groups. The political problem of capture would be better dealt with via strict campaign funding rules and disclosures.
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