Which one of the following is likely to be the most inflationary in its effect?
[amp_mcq option1=”Repayment of public debt” option2=”Borrowing from the public to finance a budget deficit” option3=”Borrowing from banks to finance a budget deficit” option4=”Creating new money to finance a budget deficit” correct=”option4″]
This question was previously asked in
UPSC IAS – 2013
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.