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

UPSC Prelims & Mains Questions

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

A)

Repayment of public debt

B)

Borrowing from the public to finance a budget deficit

C)

Borrowing from the banks to finance a budget deficit

D)

Creation of new money to finance a budget deficit

Correct Answer : Creation of new money to finance a budget deficit

Note :

Repayment of public debt : means Government is returning the borrowed money back to institutions from which it had borrowed earlier. These funds can be used by banks to create new loans, or it may be mopped up by RBI through tightening of monetary policy. Hence it may be mild inflationary or not depending on the ongoing stance.

Borrowing from the public to finance a budget deficit & Borrowing from the banks to finance a budget deficit – in both the cases, a crowding out effect will happen, reducing the funds available for lending, thereby pushing up the cost of borrowing for private players. Hence, it can be mild inflationary.

However, Creation of new money to finance a budget deficit will lead to increase in High-Powered Money supply, pushing up Money-multiplier & hence resulting in multi-fold increase in money supply in the economy. This increased money supply would lead to hyperinflation like scenario observed in Post-WW1 Germany & in Zimbabwe recently. India also witnessed such inflation in 1980s.

Year : 2021

Category : General Studies

Recently Updated in UPSC Questions

Q.

With reference to 'IFC Masala Bonds', sometimes seen in the news, which of the statements given below is/ are correct? (2016)

1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.

2. They are rupee-denominated bonds and are a source of debt financing for the public and private sector.

Select the correct answer using the code given below:

A)

1 only

B)

2 only

C)

Both 1 and 2

D)

Neither 1 nor 2

Correct Answer : Option (C) - Both 1 and 2

Note :

* The World Bank Group, which is a vital source of financial and technical assistance to developing countries, consists of five distinct yet complementary organizations, viz.,

* International Bank for Reconstruction and Development (IBRD),

* International Development Association (IDA),

* International Finance Corporation (IFC), hence, statement 1 is correct.

* Multilateral Investment Guarantee Agency (MIGA),

* International Centre for Settlement of Investment Disputes (ICSID).

* Masala Bonds are rupee-denominated borrowings issued by Indian entities in overseas markets. Masala means ‘spices’ and the term was used by International Finance Corporation (IFC) to popularise the culture and cuisine of India on foreign platforms. The objective of Masala Bonds is to fund infrastructure projects in India, fuel internal growth via borrowings and internationalize the Indian currency. Hence, statement 2 is correct.

Year : 2022

Category : General Studies

Q.

Consider the following statements:

1. The Accelerated Irrigation Benefits Programme was launched during 1996-97 to provide loan assistance to poor farmers.

2. The Command Area Development Programme was launched in 1974-75 for the development of water-use efficiency,

Which of the statements given above is/ are correct?

A)

1 only

B)

2 only

C)

Both 1 and 2

D)

Neither 1 nor 2

Correct Answer : Option (B) - 2 only

Note :

The Accelerated Irrigation Benefits Programme (AIBP) was launched in 1996 as a central assistance programme, with the aim to accelerate creation of irrigation potential.

The Command Area Development (CAD) programme was initiated in 1974-75 with a view to bridging the gap between the potential created and its utilisation and optimising agricultural productivity through better management of land and water use in the command areas served by selected major and medium irrigation projects.

Year : 2015

Category : General Studies

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