ECONOMICS
DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Deficit financing
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Rise in external loans
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Unfavourable balance of payment
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A hike in the CRR by the central bank of the country
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Detailed explanation-1: -When the government issues bonds this can be purchased by public or central banks. The government prints new currency to finance the deficit this doesn’t involve any growth in economic activity hence it increases inflation. Hence, option 3 is correct.
Detailed explanation-2: -It is observed that deficit financing is inflationary in nature. As deficit financing increases aggregate expenditure and hence increases demand, the danger of inflation becomes larger.
Detailed explanation-3: -The correct answer is Increase in money supply and Fall in production. Inflation is a caused when there is an increase in money supply and fall in production. Also occurs due to rising prices of goods and services in an economy.
Detailed explanation-4: -Deficit financing leads to inflation if the deficit incurs due to consumptive expendituresand not in the case of increasing production of goods and services.
Detailed explanation-5: -Common scenarios that create deficits by reducing revenue and increasing spending include: Tax structure that under taxes high-wage earners but overtaxes low-wage earners. Increased spending on programs like Social Security, Medicare, or military spending. Increased government subsidies to targeted industries.