Q. Which one of the following is likely to be the most inflationary in its effects?
Exp) Option d is correct.
Why this question) The Centre has decided to retain the inflation target of 4%
Deficit financing means generating funds to finance the deficit which results from excess of expenditure over revenue. The gap being covered by borrowing from the public by the sale of bonds or by printing new money.
Government expenditure by printing money boosts incomes and raises private demand in the economy. Thus, it fuels inflation. A little increase in inflation is healthy as it encourages business activity. But if the government doesn’t stop in time, more and more money floods the market and creates high inflation. And since inflation is revealed with a lag, it is often too late before governments realise, they have over-borrowed. Higher inflation and higher government debt provide grounds for macroeconomic instability.