Most inflationary budget financing method — UPSC Prelims PYQ 2013

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

1. Repayment of public debt
2. Borrowing from the public to finance a budget deficit
3. Borrowing from banks to finance a budget deficit
4. Creating new money to finance a budget deficit

Explanation

Option (d) is correct

• Creating new money to finance a budget deficit (also known as monetization of the deficit) is the most inflationary method. When new money is created and pumped into the economy without a corresponding increase in goods and services, it leads to a rise in overall demand. This results in demand-pull inflation, where too much money chases too few goods.

Answer: (d) Creating new money to finance a budget deficit; Difficulty Level: Easy