Who among the following, first mooted the idea of deficit financing?
- A.Adam Smith
- B.Alfred Marshall
- C.John Maynard Keynes
- D.Milton Friedman
Correct answer
Explanation
The correct answer is C, John Maynard Keynes. Keynes argued that in a depression the government should spend more than it earns, even by borrowing, to revive demand and employment.
In The General Theory of Employment, Interest and Money (1936), written during the Great Depression, Keynes said that unemployment arises from too little total demand. When private spending falls, public spending on works and services can fill the gap, and each rupee spent creates more income through the multiplier. Financing this through a budget deficit, rather than balancing the budget, came to be called deficit financing. In India the term often means meeting a deficit by borrowing from the central bank.
A is wrong because Adam Smith, author of The Wealth of Nations (1776), favoured limited government and balanced budgets. B is wrong because Alfred Marshall, the neoclassical economist, is known for demand, supply and elasticity, not deficit spending. D is wrong because Milton Friedman, a leader of monetarism, criticised Keynesian deficit spending and stressed control of the money supply.
Exam tip: Keynes means deficit financing and the multiplier; Friedman means monetarism.
Practice Questions
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- A.1 only
- B.3 and 4
- C.1 and 2
- D.2 and 4
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- B.Fifteenth Finance Commission
- C.Fourteenth Finance Commission
- D.Twelfth Finance Commission
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- C.Both 1 and 2
- D.Neither 1 nor 2
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- B.Economic recovery after the Second World War
- C.International Bank for Reconstruction and Development
- D.Establishment of a monetary system based on floating exchange rate
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- A.It ensures 175 days of employment to needy persons in rural areas.
- B.It gives higher wages to women workers.
- C.People are generally given both skilled and unskilled jobs.
- D.This is implemented only in rural areas of India.
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