Question #59

The projected budget deficit is $58 billion next financial year. It is likely that this injection will be

• inflationary if the private sector reacts to it and the lower interest rates and expands borrowing.
• deflationary because the potential output is growing faster than projected output (as evidenced by the Budget growth projections for GDP, labour productivity and the labour force).
• deflationary because the banks are not prepared to pass on the full central bank interest rate cuts.

Answer #582

Answer: deflationary because the potential output is growing faster than projected output (as evidenced by the Budget growth projections for GDP, labour productivity and the labour force).

Explanation

Please see Debts and deficits again! for more information. If you are unsure ask a question via the comments.