Question

During the 1970s, most Latin American coun- tries ran huge budget deficits. As their govern- ments resorted to printing money (increasing the money supply) to pay for these deficits, very high inflation rates resulted. As a consequence, real GDP declined or remained constant during the 1980s. Comment on the relationship between budget deficits, inflation, and real GDP growth.

Answer 1

Budget deficits: Budget deficits of government happen when the expenses of the federal government exceed its invoices. They reveal the monetary well-being of an economy. These put pressure on the economy as the output decreases.
Deficit spending can not be identified as great or bad. Nevertheless, they will be negative when the government spends for them by printing new money as it triggers inflation in the economy. High rates of inflation lower the benefits to invest and lead to distortion in the relative rates in the economy. Exceptionally high inflation rates have a catastrophic effect on the economy. The long-lasting stagnant or declining real GDP growth was experienced in some countries. The federal governments of these nations increased the supply of money by printing new money. These economies recuperated as new reforms were taken into location and a reduction in inflation and the deficit spending was witnessed.