UPSC Previous Year Question | Prelims GS | 2021

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

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

Answer

Correct Answer

Creation of new money to finance a budget deficit

Explanation

Creating new money (deficit monetisation) directly expands the money supply without any offsetting increase in output, making it the most inflationary option. Borrowing from the public only transfers existing purchasing power, borrowing from banks is less inflationary than printing money, and repaying public debt is contractionary or neutral.

Topics: deficit financing and money creation, economy, inflation, macroeconomics