Solution

Yes, inflation will increase if fiscal shortfalls are covered by the creation of new money. It might get worse if the government's existing consumption expenses are paid for with the new currency. A government deficit occurs when taxation is reduced while spending is increased. As a result, aggregate demand increases. Thus, in this sense, fiscal deficits are inflationary. The budget deficit won't lead to inflation if fresh money is used for capital investments in infrastructure or other projects. In this instance, a large budget deficit is accompanied with a big increase in demand, leading to greater output levels and less inflation.