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Budget deficit of the government has been rising sharply

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Reference no: EM131096207

Country Y is an industrialized economy. The budget deficit of the government has been rising sharply in the last few years. In order to fund this expenditure, the government has resorted to financing its deficit by issuing bonds. Jason McAlister, a leading economist in the country, believes that the velocity of money will remain unchanged but the price level will increase in the near future as a result of this action. However, the actual inflation turned out to be much higher than what Jason had expected.

Which of the following, if true, would explain this outcome?

A. The economy was already operating at full employment prior to the increase in money supple

B. Total tax revenue generated this year was higher than last year

C. The consumption basket that is used to estimate the inflation level in country Y has not been revised in the last three years

D. Although infrastructure investment has traditionally been the largest component of government expenditure in country T, spending in this category declined this year

 

E. Due to a decline in the production of food grains this year, the government imposed restrictions on food grain exports to ensure that the domestic demand is met

Reference no: EM131096207

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