Which of the following is likely to be the most inflationary in its effects?
[UPSC Civil Services Exam – 2021 Prelims]
(a) Repayment 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
- Creating new money to finance a budget deficit is a situation where the government prints additional currency to cover the shortfall in its budget.
- When a government resorts to printing new money to finance its deficit, it poses a higher risk of inflation. This is because an increase in the money supply leads to an automatic rise in customer demand, subsequently causing an increase in Aggregate Demand.