Assertion (A): A high fiscal deficit need not be inflationary when there are unutilised resources in the economy.
Reason (R): Deficits are criticised as inflationary because aggregate demand increases when the government raises spending or cuts taxes.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): A high fiscal deficit need not be inflationary when there are unutilised resources in the economy. — True. With idle resources, firms can produce more to meet the extra demand, so prices need not rise.
Reason (R): Deficits are criticised as inflationary because aggregate demand increases when the government raises spending or cuts taxes. — True. This is the main criticism of deficits.
Why R does not explain A?
R gives the argument for deficits being inflationary; A says when they are not. The real explanation of A: with unutilised resources, output is held back by lack of demand, so a high deficit brings greater output, not higher prices.
NCERT (2026-27): “Other Perspectives on Deficits and Debt: One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand increases. Firms may not be able to produce higher quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise. However, if there are unutilised resources, output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand and greater output and, therefore, need not be inflationary. …” |