CBSE Class 12-commerce Answered
Deficit budget can be financed in the following ways:
Deficit financing: It means borrowing by the government from the Central bank against treasury bills. The Central bank purchase treasury bills for cash and the government uses these funds to finance the deficit. It increases the flow of money circulation in the economy. Therefore, there is an increase in demand for goods which leads to a raise in the general price level, while other things remaining constant. If the rate of inflation is high in the economy, then deficit financing is not suggested as means of financing.
Borrowing from the public: Government raise loans by issuing bonds of various types to the public which involves the burden of interest payment called public debt interest. It discourages investment and affects the economic growth.