Which one of the following is likely to be the most inflationary in its effects?
Answer & explanation
Answer: (d) Creation of new money to finance a budget deficit
A deficit can be financed by taxes, borrowing or printing money. Borrowing only moves existing money from lenders to the government, but creating new money adds to the money supply while the supply of goods stays the same, so it pushes prices up the most.
- ✓ (d) New money raises total spending power without adding output, the classic cause of demand-pull inflation.
- ✗ (b) Borrowing from the public takes money people would otherwise have spent or saved, so the net addition to demand is smaller.
- ✗ (c) Bank borrowing uses deposits already in the system; it can add to demand but far less than fresh money creation.
Remember · Deficits are financed by taxation, borrowing or printing money; printing (monetising) the deficit is the most inflationary.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 5 “Budgetary deficits must be financed by either taxation, borrowing or printing money.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 5 “One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand increases.”
Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·