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

1. A. Repayment of public debt
2. B. Borrowing from the public to finance a budge deficit
3. C. Borrowing from the banks to finance a budge deficit
4. D. Creation of new money to finance a budget deficit

Answer: D

Explanation

Borrowing from public and banks will lead to a decrease in the money supply in market as in both the options money in hand is reduced for public and money to lend is reduced for banks. Creation to new money to finance a budget deficit will have more inflationary effect than repayment of debt, as it will lead to an increase in total money supply in the market.(as new money is being created). Hence option (d) is the correct answer. During last fiscal year, option of monetization of deficit was explored but idea was dropped due to likely inflationary pressure.