Which one of the following is likely to be the most inflationary in it

Which one of the following is likely to be the most inflationary in its effect?

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Repayment of public debt

Borrowing from the public to finance a budget deficit

Borrowing from banks to finance a budget deficit

Creating new money to finance a budget deficit

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2013

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Creating new money to finance a budget deficit is likely to be the most inflationary among the given options.

Financing a budget deficit by creating new money (also known as seigniorage or printing money) directly increases the money supply in the economy without a corresponding increase in output. This is a direct monetary expansion that can lead to significant demand-pull inflation, especially if the deficit is large.

Borrowing from the public (B) involves transferring existing money from the public to the government. Borrowing from banks (C) involves credit creation by banks, which also increases money supply but often through a multiplier effect rather than directly creating base money like option D. Repayment of public debt (A), unless financed by printing money, generally doesn’t cause inflation and can even reduce demand if financed through taxation or borrowing from other sources. Direct money creation (D) is considered the most inflationary because it directly increases the monetary base.

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