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Q: Which one of the following is likely to be the most inflationary in its effect?
a) Repayment of public debt
b) Borrowing from the public to finance a budget deficit
c) Borrowings from banks to finance a budget deficit
d) Creating new money to finance a budget deficit
Correct Answer: Option (d)
- Borrowing from the public or from the banks to finance a budget deficit will lead to decrease the money supply in the market. Repayment of public debt and creating new money both are inflationary in nature but creating new money to finance a budget deficit is the most inflationary in its effect. Hence, option (d) is correct.
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