{"id":91858,"date":"2025-06-01T11:07:57","date_gmt":"2025-06-01T11:07:57","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=91858"},"modified":"2025-06-01T11:07:57","modified_gmt":"2025-06-01T11:07:57","slug":"which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-it-2","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-it-2\/","title":{"rendered":"Which one of the following is likely to be the most inflationary in it"},"content":{"rendered":"

Which one of the following is likely to be the most inflationary in its effects?<\/p>\n

[amp_mcq option1=”Repayment of public debt” option2=”Borrowing from the public to finance a budget deficit” option3=”Borrowing from the banks to finance a budget deficit” option4=”Creation of new money to finance a budget deficit” correct=”option4″]<\/p>\n

\n
\n
This question was previously asked in<\/div>\n
UPSC IAS – 2021<\/div>\n<\/div>\n
Download PDF<\/a>Attempt Online<\/a><\/div>\n<\/div>\n
\nFinancing a budget deficit involves the government covering the gap between its spending and revenue. Different methods have different inflationary potentials:
\nA) Repayment of public debt: This is paying back outstanding loans. It injects liquidity into the economy but is not a method of financing a *deficit*.
\nB) Borrowing from the public: The government borrows existing savings from individuals and institutions. This transfers purchasing power from the public to the government, using existing money. It is generally considered the least inflationary method of deficit financing.
\nC) Borrowing from the banks: Banks can create credit based on their reserves. When the government borrows from banks, it can lead to an expansion of credit and money supply, which is more inflationary than borrowing from the public, but less so than creating new money.
\nD) Creation of new money (Monetizing the deficit): This involves the central bank directly financing the government deficit, essentially printing new money or crediting the government’s account without a corresponding withdrawal of purchasing power from the economy. This directly increases the money supply and is widely considered the most inflationary method of financing a deficit, as it adds fresh liquidity without increasing the supply of goods and services in the short term.
\n<\/section>\n
\nFinancing a deficit by creating new money directly increases the money supply without withdrawing existing purchasing power, making it the most inflationary method compared to borrowing existing funds from the public or banks.
\n<\/section>\n
\nExcessive reliance on deficit monetization can lead to hyperinflation, as seen in several historical cases. Modern central banks often have legal restrictions on direct financing of government deficits to maintain price stability.
\n<\/section>\n","protected":false},"excerpt":{"rendered":"

Which one of the following is likely to be the most inflationary in its effects? [amp_mcq option1=”Repayment of public debt” option2=”Borrowing from the public to finance a budget deficit” option3=”Borrowing from the banks to finance a budget deficit” option4=”Creation of new money to finance a budget deficit” correct=”option4″] This question was previously asked in UPSC … <\/p>\n

Detailed SolutionWhich one of the following is likely to be the most inflationary in it<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1092],"tags":[1110,1120,1190],"class_list":["post-91858","post","type-post","status-publish","format-standard","hentry","category-upsc-ias","tag-1110","tag-economic-development","tag-money-banking","no-featured-image-padding"],"yoast_head":"\nWhich one of the following is likely to be the most inflationary in it<\/title>\n<meta name=\"description\" content=\"Financing a budget deficit involves the government covering the gap between its spending and revenue. Different methods have different inflationary potentials: A) Repayment of public debt: This is paying back outstanding loans. It injects liquidity into the economy but is not a method of financing a *deficit*. B) Borrowing from the public: The government borrows existing savings from individuals and institutions. This transfers purchasing power from the public to the government, using existing money. It is generally considered the least inflationary method of deficit financing. C) Borrowing from the banks: Banks can create credit based on their reserves. When the government borrows from banks, it can lead to an expansion of credit and money supply, which is more inflationary than borrowing from the public, but less so than creating new money. D) Creation of new money (Monetizing the deficit): This involves the central bank directly financing the government deficit, essentially printing new money or crediting the government's account without a corresponding withdrawal of purchasing power from the economy. This directly increases the money supply and is widely considered the most inflationary method of financing a deficit, as it adds fresh liquidity without increasing the supply of goods and services in the short term. Financing a deficit by creating new money directly increases the money supply without withdrawing existing purchasing power, making it the most inflationary method compared to borrowing existing funds from the public or banks.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-it-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Which one of the following is likely to be the most inflationary in it\" \/>\n<meta property=\"og:description\" content=\"Financing a budget deficit involves the government covering the gap between its spending and revenue. Different methods have different inflationary potentials: A) Repayment of public debt: This is paying back outstanding loans. It injects liquidity into the economy but is not a method of financing a *deficit*. B) Borrowing from the public: The government borrows existing savings from individuals and institutions. This transfers purchasing power from the public to the government, using existing money. It is generally considered the least inflationary method of deficit financing. C) Borrowing from the banks: Banks can create credit based on their reserves. When the government borrows from banks, it can lead to an expansion of credit and money supply, which is more inflationary than borrowing from the public, but less so than creating new money. D) Creation of new money (Monetizing the deficit): This involves the central bank directly financing the government deficit, essentially printing new money or crediting the government's account without a corresponding withdrawal of purchasing power from the economy. This directly increases the money supply and is widely considered the most inflationary method of financing a deficit, as it adds fresh liquidity without increasing the supply of goods and services in the short term. Financing a deficit by creating new money directly increases the money supply without withdrawing existing purchasing power, making it the most inflationary method compared to borrowing existing funds from the public or banks.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/exam.pscnotes.com\/mcq\/which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-it-2\/\" \/>\n<meta property=\"og:site_name\" content=\"MCQ and Quiz for Exams\" \/>\n<meta property=\"article:published_time\" content=\"2025-06-01T11:07:57+00:00\" \/>\n<meta name=\"author\" content=\"rawan239\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"rawan239\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Which one of the following is likely to be the most inflationary in it","description":"Financing a budget deficit involves the government covering the gap between its spending and revenue. 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D) Creation of new money (Monetizing the deficit): This involves the central bank directly financing the government deficit, essentially printing new money or crediting the government's account without a corresponding withdrawal of purchasing power from the economy. This directly increases the money supply and is widely considered the most inflationary method of financing a deficit, as it adds fresh liquidity without increasing the supply of goods and services in the short term. 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