The evil of deficit financing is :

Question

Accepted Answer

The correct option is 1:

Deficit financing refers to the practice where the government spends more money than it receives as revenue, covering the shortfall, or deficit, usually by borrowing from the central bank (Reserve Bank of India in the Indian context) or by printing new currency. When the central bank finances the deficit, it leads to an increase in the money supply in the economy without a corresponding increase in the supply of goods and services. According to the quantity theory of money, more money chasing the same amount of goods inevitably leads to a general rise in prices, which is inflation. This inflationary pressure is considered the most significant and classic "evil" of deficit financing, as it erodes the purchasing power of the public, particularly affecting the poor and fixed-income groups.

The incorrect option is 2:

Boost unemployment. Deficit financing, especially when used for public investment projects, often increases aggregate demand and stimulates economic activity. In the short run, this increased demand typically leads to higher employment, rather than boosting unemployment. It is sometimes used as a tool to combat recession and unemployment, based on Keynesian principles.

The incorrect option is 3:

Decrease in monetary income. Deficit financing injects new money into the economy through government spending, leading to an increase in the total flow of money and, consequently, an increase in the monetary income (nominal income) of the population. Therefore, deficit financing tends to increase monetary income, not decrease it.

The incorrect option is 4:

All options are wrong. Since Option 1, "Boost inflation," is the well-established primary negative consequence (evil) of deficit financing, this option is incorrect.