Prelims 2013 · Economy · Question 34
Which one of the following is likely to be the most inflationary in its effect?
Answer
Creating new money to finance a budget deficit
- (a) Repayment of public debt: This generally reduces government liabilities and does not directly expand money supply; by itself, it is not the most inflationary. Verdict: Incorrect.
- (b) Borrowing from the public to finance a budget deficit: This transfers existing purchasing power from the public to the government; money supply does not automatically rise. Verdict: Not the most inflationary.
- (c) Borrowings from banks to finance a budget deficit: This can be inflationary because bank credit may expand, but it is still less direct than printing money. Verdict: Inflationary, but not the most.
- (d) Creating new money to finance a budget deficit: Deficit financing through new money creation directly increases money supply and aggregate demand, making it the most inflationary. Verdict: Correct.