The correct answer is: c) Borrowing funds.
Deficit financing is a government’s practice of spending more money than it takes in through taxes and other revenue. The government borrows money to cover the difference, which is called the deficit.
There are several reasons why a government might use deficit financing. One reason is to stimulate the economy. When the government spends money, it puts money into the hands of consumers and businesses, which can lead to increased spending and economic growth.
Another reason for deficit financing is to finance capital projects, such as roads, bridges, and schools. These projects can be expensive, and the government may not have enough revenue from taxes to cover the cost. By borrowing money, the government can finance these projects without raising taxes.
Deficit financing can also be used to respond to a recession or other economic downturn. When the economy is weak, the government may need to spend more money to stimulate growth. This can be done by increasing spending on social programs, infrastructure, or tax cuts.
However, deficit financing also has some risks. If the government borrows too much money, it can lead to higher interest rates and inflation. This can make it more difficult for businesses to borrow money and invest, and it can also make it more difficult for people to afford goods and services.
Overall, deficit financing is a tool that can be used to stimulate the economy, finance capital projects, or respond to a recession. However, it is important to use deficit financing carefully to avoid the risks of higher interest rates and inflation.
Here is a brief explanation of each option:
a) Reducing spending: This is not deficit financing. Deficit financing is when the government spends more money than it takes in, not less.
b) Increasing taxes: This is not deficit financing. Deficit financing is when the government borrows money to cover the difference between its spending and its revenue, not when it raises taxes.
c) Borrowing funds: This is deficit financing. When the government borrows money, it is essentially spending money that it does not have. This is how the government can spend more money than it takes in.
d) Printing more money: This is not deficit financing. Printing more money can lead to inflation, which is a decrease in the value of money. This can make it more difficult for businesses to borrow money and invest, and it can also make it more difficult for people to afford goods and services.