SSC Selection Post 2025 PYQ — Question 5

Correct Answer: To stimulate economic growth

Explanation

Deficit financing is a fiscal policy tool where a government spends more money than it earns from revenue, typically by borrowing or printing new currency. The primary objective behind this approach is to stimulate economic growth and fund essential developmental projects that might otherwise remain underfunded. By injecting additional liquidity into the economy, the government aims to boost demand, create employment opportunities, and accelerate infrastructure development.

Key Points

• The primary objective of deficit financing is to stimulate economic growth. By spending more than it collects in revenue, a government can inject necessary liquidity into the economy during periods of stagnation or recession.
• This approach allows the state to fund critical infrastructure projects, create employment opportunities, and boost aggregate demand, which are essential for accelerating development in both industrial and social sectors.
• This tool is frequently employed in developing nations to jumpstart industrialization and bridge the gap between necessary public expenditure and available resources.

Additional Facts

• While deficit financing promotes growth, it carries a significant inflationary risk. If the increased supply of money in the economy outpaces the actual production of goods and services, it can lead to demand-pull inflation, causing prices to rise.
• Governments must balance these short-term fiscal injections with long-term consolidation plans to maintain macroeconomic stability and prevent the debt burden from becoming unsustainable.

Important Questions

Question: What happens when the money supply increases rapidly due to high deficit financing?

Answer: It often leads to demand-pull inflation, where the prices of goods and services rise.

Question: Is deficit financing considered a standard tool for budget management?

Answer: Yes, it is a standard practice, but it must be managed carefully to ensure debt sustainability and prevent long-term economic instability.