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

Options

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

Correct Answer

Creation of new money to finance a budget deficit

Explanation

Printing new money increases the money supply without a corresponding increase in goods and services, leading to demand-pull inflation — the most inflationary option.

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