Question

“Persistent budget deficits always lead to higher inflation.” Is this statement true, false, or uncertain? Explain your answer

Short answer

The statement is false.

Step-by-step solution

Step 1. Define budget deficit.

A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country.

Step 2. Explanation

Inflation rises only when the shortfall is supplied by money creation. It broadens the monetary base and expands the supply of money. There will be no rise in the monetary supply if the Fed employs bonds to boost public bond holdings.

So, the statement is false.