Answer: Option D
Answer: (d)
When government incurs a fiscal deficit, then it spends more on the economy resulting in an increase in total/aggregate demand. But if total supply also increases, then inflation may not increase. So, the government’s fiscal deficit will necessarily increase aggregate demand but may not increase effective demand. So, (i) the statement is true.
When the economic capacity is fully (100%) utilized and the government spends more than demand increases in the economy but supply may not immediately increase and the companies will have to set up new capacity which may increase cost, resulting in inflation.
But if the economic capacity is underutilized, because of less demand and then the government spends more then the increase in aggregate demand will be met by increased supply, and there may not be inflation.
So, fiscal deficit may or may not cause inflation.