Question
Which one of the following is likely to be the most inflationary in its effects?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks the to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Answer:
D
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Explanation:
Creation of new money to finance a budget deficit. When the government creates new money to finance a budget deficit, it increases the money supply in the economy. This increase in the money supply can lead to inflationary pressure because there is more money available to chase the same amount of goods and services. As a result, the value of money decreases, and prices tend to rise. This is known as demand-pull inflation, where the increased money supply fuels higher demand for goods and services, driving up prices. In contrast, options (a), (b), and (c) involve different forms of borrowing to finance a budget deficit but do not directly involve the creation of new money, making them relatively less inflationary in their effects.