How can budget surpluses lead to deflation?
1 Answer
using the cost push inflation
budget surplus is when there is a positive difference between the current government budget and the previous government budget of a country. Inflation occurs when too much money is chasing few resources, being goods and services.
Surplus in the government budget would in turn result in the following steps.
The government will decrease the tax rates paid by companies and producers in a country. With increased revenue (decreased production cost) the producers will increase their levels of production, because they have the resources to do so.
This increased level of production constitutes expansions, and acquiring of new land as well.
assuming that prices encourage producers to enter a market, the market participants will grow, increasing the production rates in the market as a result. with the knowledge of the market forces of demand and supply, the prices will decrease as a result, assuming that demand remains constant.
the price decreases are the opposite of inflation, making deflation realizable.
