[Solved] Which one of the following is likely to be the most inflationary in its effects?

Q10. Which one of the following is likely to be the most inflationary in its effects?

A. Repayments of public debt

B. Borrowing from the public to finance a budget deficit

C. Borrowing from the banks to finance a budget deficit

D. Creation of new money to finance a budget deficit

Answer: D

When total expenditures exceed total revenues, there is a budget deficit.

• A tool for raising money to create a budget deficit is known as deficit financing.

• There are three ways to finance a budget:

• Creating new currency (Inflationary)

• Borrowing from internal sources like RBI, issuing bonds, etc. (Not inflationary)

• Borrowing from External sources like WB, IMF, etc. (Not inflationary)