QUESTION

Easy

Economy

Prelims 2021

Which one of the following is likely to be the most inflationary in its effects?

Select an option to attempt

Explanation

Out of the given options, the most inflationary effect is likely caused by (D) Creation of new money to finance a budget deficit.

Option A is incorrect: Repayment of public debt actually removes money from circulation, potentially leading to deflationary pressure.

Option B and C are incorrect: Borrowing from the public (B) or banks (C) - While these options involve increasing government debt, they don't directly increase the money supply. The government essentially takes money that already exists in the economy.

Option D is correct: Creation of new money is the most inflationary option. This can lead to an increase in the money supply, which can put upward pressure on prices (inflation) if not accompanied by a corresponding increase in goods and services.

In essence, printing new money directly expands the money supply, potentially outpacing economic growth and leading to inflation.

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