UPSC Prelims 2013 · Question 34 of 99
UPSC Prelims 2013 question on Deficit Financing Inflation
- ExamUPSC CSE
- Year2013
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicPublic Finance
- DifficultyEasy
- TypeDirect
Which one of the following is likely to be the most inflationary in its effect?
Show answer
Answer: D. Creating new money to finance a budget deficit
Analysis
Creating new money to finance a budget deficit is the most inflationary because it directly increases the money supply in the economy without a corresponding increase in production. Higher money supply raises aggregate demand and leads to inflationary pressure. Borrowing from the public or banks does not expand money supply to the same extent. Therefore, monetization of deficit through creation of new money has the strongest inflationary impact.
Extra UPSC info
Financing government deficit by printing currency is also known as deficit monetization.