Question

Which of the following is/are the likely effects of deficit financing by the Government?

1. Increase in inflation

2. Cheaper imports

3. Fall in exports

Select the correct answer using the code given below.

1. 1 only
2. 3 only
3. 1 and 2 only
4.  2 and 3 only

Answer 1

Correct Answer - Option 1 : 1 only

The correct answer is 1 only.

• Deficit financing is a situation where RBI pumps in money to finance the deficit of the Government.
• This leads to an increase in money supply. Any increase in money supply is likely to lead to inflation. Hence, statement 1 is correct.
• Inflation leads to a fall in the value of the Rupee.
• Any depreciation in the rupee will make India‘s exports more competitive and imports costlier. Hence, statements 2 and 3 are NOT correct.