Question
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) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit
Answer:
D
To suggest corrections, send feedback using feedback button in top menu.
To suggest corrections, use feedback icon on top menu.
Explanation:
Creating new money to finance a budget deficit, also known as monetizing the deficit, is likely to be the most inflationary in its effect. When the government creates new money to finance its spending beyond its revenue, it increases the money supply in the economy. This excess money supply can lead to an increase in aggregate demand, which can in turn drive up prices.
When there is more money in circulation relative to the available goods and services, it can create a situation of too much money chasing too few goods. This can result in inflationary pressures, causing the general level of prices to rise.
Repayment of public debt (option a) does not directly contribute to an increase in the money supply and is not considered inflationary. Borrowing from the public or banks to finance a budget deficit (options b and c) may have some inflationary effects, but they do not involve the direct creation of new money like option d.