Previous year MCQs

Economy UPPSC 2016 GS-I
Question

What is the effect of deficit financing on economy?

Answer & Solution

Answer: (Detailed Solution Below)

Option C: Increase in money supply

Detailed Solution:

The correct answer is “Increase in money supply”.
The effect of deficit financing on the economy is primarily an increase in money supply. When a government engages in deficit financing, it borrows money, often from the central bank, or prints new money to cover the shortfall between its expenditures and revenues, which leads to an increased supply of money in the economy. This can lead to inflation if not managed properly.

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