A potential problem with running continuous fiscal deficits is that the spending builds up over time which adds to inflationary pressures.
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.
As long as the flow of net spending from the public sector is consistent with filling the non-government spending gap then a nation can absorb continuous fiscal deficits without inflationary pressures building.
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.
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