In what way does budget deficit cause inflation. Someone please help me?

Question

In what way does budget deficit cause inflation. Someone please help me?

Answer 1

The more we owe,the more interest we pay. Since we are never paying down the principle,only the interest, inflation will rise, because we have a negative balance.

Answer 2

the more you owe the more interest you pay; the US govt borrow money from countries like Japan (the biggest creditor of the world) by issuing their US T-Bill (example: this is a paper that says we're gonna pay you back with 2 % interest after 10 years).

so when time comes to pay back, the govt have to pay back the japanese by YEN. this mean the govt have to sell US$ in the market and buy Yen. this lowers the price of US$ and boosts the Yen value (the law of supply and demand).

so to cut to the chase, the more you owe, the more likely US$ gets weaker. when US$ is weaker the price of imported goods get higher. (currency and price of goods are negatively correlated; a chinese imported shoes that once was $20, becomes $30 if US$ gets weaker, i.e. weaker exchange rate)

when things get expensive, now that's inflation. As the US is the No1 importer of foreign goods and has largest consumption (30% of the world consumption), weaker US$ has a big impact in your economy.

ALSO, a country with a big deficit is like a someone with debts up to his neck. no country or individual would wanna buy or hold a currency or bonds from such country. traders would sell such bonds and investors would pull their money off from that country. when they do that they create a big efflux of money, which means weaker US$.

Answer 3

the increase in govt. spending will increase GDP, which in turn will increase aggregate demand in the short-run; however, in the long-run, increase in govt. spending will cause both demand-pull (due to excess demand) and cost-push (due to input prices) inflation