Q. 15

What is Fiscal discipline? What happens when Fiscal discipline is not maintained in the economy?

Answer :

● Fiscal discipline means that the government should create a balance between its expenditure and revenue.


● It should not only focus upon increasing its revenue or earnings but it must also try to reduce its expenditures.


● If the fiscal discipline is not maintained in the economy it will lead to the fiscal deficit.


● A fiscal deficit means the increase in the borrowing requirement of the government.


● The main source of borrowing for the Government of a country is from its Central Bank.


● This is done in the form of deficit financing which implies the printing of new currency notes.


● This will lead to an increase in money circulation and will cause inflation.


● The flow of money will be greater than the volume of output in the economy.


● The production cost will increase accompanied by low aggregate demand.


● The investment will fall, unemployment will increase and the economy will fall into a low level of equilibrium trap.


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