A government can finance its budget deficit in different ways. Which of the following directly increases the money supply in the economy?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Printing new money
A deficit can be met by taxation, borrowing or printing money. Only printing money adds new money to the economy. Taxes, borrowing and sale of PSU shares only move existing money from the public to the government.
When the government borrows from the central bank to meet its deficit, money supply rises, and this may lead to inflation.
NCERT (2026-27): “Debt Budgetary deficits must be financed by either taxation, borrowing or printing money. Governments have mostly relied on borrowing, giving rise to what is called government debt. …” Glossary: “Deficit financing through central bank borrowing – Financing of budget deficit by the government through borrowing money from the central bank. Leads to increase in money supply in an economy and may result in inflation.” |