restricting fiscal deficit is a sign of fiscal discipline . but it may not work when economy is suffering from deflanatory gap. explain
Restricting Fiscal Deficit (or borrowings) is a sign of fiscal discipline as it reduces the financial burden of principal repayment and interest payment on future generations. However, sometimes, borrowings can be advantageous if a major part of them is used for buying capital goods which add to the capital stock of the economy, thereby improving its productivity and efficiency.
At times of deflationary gap (or deficient demand), aggregate demand turns out to be lower than aggregate supply, i.e. what consumers are willing to buy is less than what producers are ready to sell.
The funds received by the government through Borrowings can be used for Gross Public Investment, i.e. building railways, roadways, dams, bridges, etc. This leads to rise in employment, which leads to rise in income in the hands of consumers. With greater income, the household sector will start demanding more goods and services, thereby curbing Deflationary Gap in the economy.
At times of deflationary gap (or deficient demand), aggregate demand turns out to be lower than aggregate supply, i.e. what consumers are willing to buy is less than what producers are ready to sell.
The funds received by the government through Borrowings can be used for Gross Public Investment, i.e. building railways, roadways, dams, bridges, etc. This leads to rise in employment, which leads to rise in income in the hands of consumers. With greater income, the household sector will start demanding more goods and services, thereby curbing Deflationary Gap in the economy.