This study aims to examine the increasing government fiscal deficit as a fiscal expansion by increasing spending will increase aggregate demand. Where excessive aggregate demand will cause inflation. High inflation rateswill lead to lower economic growth and to affect the macroeconomic and financial instability (Fisher 1983; Sarel 1996; Khan & Senhaji 2001). Empirical analysis using a ARDL model (Autoregressive Distributed Lag) and the method of Bounds co-integration test supports the Keynesian view that fiscal policy is larger than the effect on output policy for the long term monetary of Malaysia during the period 1970 to 2006. Long-term relationship between fiscal deficits in countries such as debt, external debt and government budget deficits and macroeconomic variables on inflation. The variables studied are variable deficit, domestic debt and external debt in GDP, national income, government expenditure, aggregate demand, and prices outside the country. While the national interest, foreign interest and exchange rates as the basis monetary also identified. Elasticity of short and long term is considered to see the effects of changes in a variable on other variables. Finally, some policy implications are provided based on the available studies.
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