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Chapter 20: Q 5. (page 546)

Why would a central bank be concerned about persistent, long-term budget deficits?

Short Answer

Expert verified

A central bank would be concerned about persistent, long-term budget deficits as it has the potential to raise inflation expectations.

Step by step solution

01

Step 1. Define budget deficit.

A budget deficitoccurs when expenses exceed revenue and indicate the financial health of a country.

02

Step 2. Explanation

Long-term fiscal deficits would worry a central bank because they could boost inflation expectations, making it more difficult to keep inflation at a modest, stable level.

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