Abstract

In Jordan, among other countries, the public sector is highly valued because it offers public services, practices, and steers economic activity so that it achieves public aims in the economy. In most of the developing countries, self - resources were insufficient to finance the process of expenditure which resulted in a financial deficiency in the public budget of the governments of those countries. So. they were obliged to cover the deficiency via external and internal loans but their consequences have been a big burden on the total variables in the economy in general and also on the money variables via opposite elements to the money supply This will eventually lead to a continuous increase at the public level of prices. Jordan has witnessed social, economic, and political changes during the eighties and nineties, in other words, there has been a crisis in the dinar exchange rate in the late eighties of this century ln addition to the first and second gulf wars that led to rapid growth in the public expenditure to face those changes. Consequently, the government had to loan internally andexternally — mean while most Arab aids were halted — the aids on which the government highly depended on to finance its budget so that it could cover the deficiency in the budget which affected the money supply and the Jordanian central bank reserve of foreign currency and this affected the general level of prices as well and led to much more inflation. The study analyses the effect of the external and internal loans at the general level of prices using theoretical analysis. The study also reveals how the deficiency affects the inflation average in Jordan during the period of the study (1988-2002).