Correct Option (d):
Creating new money to finance a budget deficit, also known as monetization of the deficit, involves the government directly printing currency or borrowing from the central bank, which effectively creates new money. This action directly increases the money supply in the economy without a corresponding increase in the production of goods and services. A larger money supply chasing the same quantity of goods and services leads to a general rise in prices, making it the most direct and potent cause of demand-pull inflation among the given options.
Incorrect Options:
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Option (a) Repayment of public debt: Repaying public debt involves the government returning borrowed funds to lenders. While this increases liquidity in the hands of the public, it is generally a redistribution of existing money rather than a net creation of new money. If financed through taxation or existing surpluses, it is not inflationary. If financed through new borrowing, the net effect depends on the source of borrowing, but it is less inflationary than direct money creation.
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Option (b) Borrowing from the public to finance a budget deficit: When the government borrows from the public, it absorbs existing savings and liquidity from the economy. This reduces the funds available for private consumption and investment, potentially leading to a "crowding out" effect. This action primarily reallocates existing money and is generally considered neutral or even disinflationary in its immediate effect on the overall money supply and prices.
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Option (c) Borrowing from banks to finance a budget deficit: Government borrowing from commercial banks involves banks creating credit for the government. This process can lead to an increase in the money supply (M3). However, it is a less direct form of money creation compared to the central bank directly printing new money. While it can be inflationary, its impact is generally less severe and more constrained by the banking system's capacity and regulations than direct monetization of the deficit.