The correct answer is (c). Deficit financing is the practice of a government spending more money than it takes in through taxes and other revenue. This can be done by borrowing money, printing money, or selling assets. Deficit financing can have a number of effects on the economy, including:
- Increasing the money supply: When the government borrows money, it creates new money. This can lead to inflation, as there is more money chasing the same amount of goods and services.
- Reducing interest rates: When the government borrows money, it drives up demand for loans. This can lead to lower interest rates, as lenders are willing to lend money at lower rates in order to compete for borrowers.
- Stimulating the economy: When the government spends money, it puts money into the hands of consumers and businesses. This can lead to increased spending and economic growth.
- Increasing the national debt: When the government borrows money, it adds to the national debt. This can be a problem if the debt becomes too large, as it can lead to higher interest rates and inflation.
In conclusion, deficit financing can have a number of effects on the economy, both positive and negative. It is important to weigh the costs and benefits of deficit financing before deciding whether or not to use it.
(a) Reduction in taxes: This is not an effect of deficit financing. In fact, deficit financing can often lead to an increase in taxes, as the government needs to raise revenue to pay off its debts.
(b) Increase in wages: This is also not an effect of deficit financing. Wages are determined by a number of factors, including the supply and demand for labor, the productivity of workers, and the minimum wage. Deficit financing does not have a direct impact on wages.
(d) Decrease in money supply: This is also not an effect of deficit financing. As mentioned above, deficit financing can lead to an increase in the money supply.