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