Chapter 16, Problem 1QFT

To determine

Inflation:

The situation in the economy when the supply of money exceeds its demand and there is a hike in the price of all the goods and services, this situation is called as inflation.

Budget deficit:

The situation when the spending or expenditure of the government is more than its revenue, it’s known as a deficit budget for the government.

Answer to Problem 1QFT

• In the given case, there exists a problem of budget deficit as well as the problem of inflation and the government of Argentina was unable to control either of these problems.

• The government of Argentina was unable to control either of these problems because if the government wanted to control inflation then they would have to either raise the tax or cut down it’s spending, and in both situation, the ultimate burden will be on the people of Argentina.

• In the other case, if the government tries to control its budget deficit then it has to borrow from the world market, and the borrowing will result in a further rise in inflation.

Explanation of Solution

• The inflation of the economy can be controlled if the taxes are raised or if the government spending can be cut down.

• The problem of budget deficit can be controlled only if the government borrows from outside sources.