Apedia Logo Apedia
Join

Choose Language

Select your preferred reading language
🇬🇧
English
✔
🇮🇳
हिन्दी
✔
✕
Full View
Economy
Macroeconomics
EN हिंदी
✕
UPSC Prelims 2021 Paper-1 📅 10 Oct, 2021

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 the banks to finance a budget deficit
D
Creation of new money to finance a budget deficit
Result Summary
Logo

APEDIA

UPSC Prelims
2021 • 10 Oct, 2021 • Paper-1
Which one of the following is likely to be the most inflationary in its effects?
Correct Answer
Creation of new money to finance a budget deficit
Mechanism of Financing Deficits: When a government repays public debt or borrows from the public/banks, it is essentially transferring existing liquidity within......
Ref/Book : UPSC Prelims 2021
Ref. Subject Economy
Chapter -
Ref. Topic Macroeconomics
Pg. No -
💡 Analysis & Explanation
Mechanism of Financing Deficits ▼
When a government repays public debt or borrows from the public/banks, it is essentially transferring existing liquidity within the system. Purchasing power changes hands, but the total money supply in the broader economy remains relatively stable.
Monetization Impact ▼
Conversely, creating new money (monetizing the deficit by printing currency or central bank credit) introduces entirely new, unbacked liquidity into the financial system.
Inflationary Consequence ▼
This sudden expansion of the monetary base increases the aggregate money supply without a corresponding increase in the output of goods and services. Consequently, more money chases the same amount of goods, leading to severe demand-pull inflation.
Conclusion ▼
Deficit financing through the creation of new money inherently produces the strongest inflationary pressures.
← Prev
10 / 100
Next →