The correct answer is: A. government expenditure leads to increase in the aggregate supply in ratio of aggregate demand.
Deficit financing is a situation where the government spends more money than it collects in taxes. This can lead to inflation, which is a general increase in prices. However, deficit financing can be checked if the government takes steps to increase aggregate supply. Aggregate supply is the total amount of goods and services that a country can produce. If aggregate supply increases, then the prices of goods and services will not rise as much.
There are a number of ways that the government can increase aggregate supply. One way is to invest in infrastructure, such as roads, bridges, and airports. This will create jobs and stimulate the economy. Another way to increase aggregate supply is to reduce taxes. This will put more money in the hands of consumers and businesses, which will lead to increased spending.
The government can also increase aggregate supply by deregulating the economy. This will make it easier for businesses to start and operate, which will lead to increased production.
In conclusion, deficit financing can lead to inflation, but it can be checked if the government takes steps to increase aggregate supply.
Here is a brief explanation of each option:
- Option A: Government expenditure leads to increase in the aggregate supply in ratio of aggregate demand. This is the correct answer because it is the only option that would lead to an increase in aggregate supply.
- Option B: Only aggregate demand is increased. This would lead to inflation because there would be more money chasing the same amount of goods and services.
- Option C: All the expenditure is denoted national debt payment only. This would not lead to inflation because there would be no increase in aggregate demand.