{"id":1984,"date":"2024-03-31T00:22:46","date_gmt":"2024-03-30T18:52:46","guid":{"rendered":"https:\/\/lotusarise.com\/qna\/?p=1984"},"modified":"2024-04-03T07:01:01","modified_gmt":"2024-04-03T01:31:01","slug":"q-which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-its-effect","status":"publish","type":"post","link":"https:\/\/lotusarise.com\/qna\/upsc\/q-which-one-of-the-following-is-likely-to-be-the-most-inflationary-in-its-effect","title":{"rendered":"Q.\u00a0Which one of the following is likely to be the most inflationary in its effect?"},"content":{"rendered":"\n<ul class=\"mcq wp-block-list\">\n<li>Repayment of public debt<\/li>\n\n\n\n<li>Borrowing from the public to finance a budget deficit<\/li>\n\n\n\n<li>Borrowing from banks to finance a budget deficit<\/li>\n\n\n\n<li>Creating new money to finance a budget deficit<\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>Answer: (d) Creating new money to finance a budget deficit<\/strong><\/p>\n<\/blockquote>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"notes-hd-660843a9a7d97\">Notes:<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Deficit financing means&nbsp;<strong>generating funds to finance the deficit which results from excess expenditure over revenue<\/strong>. The gap is being covered by borrowing from the public by the sale of bonds or by printing new money. Deficit financing is<strong>&nbsp;inherently inflationary<\/strong>.<\/li>\n\n\n\n<li>Since deficit financing raises aggregate expenditure and, hence,&nbsp;<strong>increases aggregate demand, the danger of inflation looms large<\/strong>. Printing new currency notes increases the flow of money in the economy. This leads to an increase in inflationary pressures which leads to a rise of the prices of goods and services in the country. And since inflation is revealed with a lag, it is often too late before governments realize, they have over-borrowed. Higher inflation and higher government debt provide grounds for macroeconomic instability.<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"what-causes-a-budget-deficit\"><strong>What Causes a Budget Deficit?<\/strong><\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Both levels of\u00a0<strong>taxation and spending affect a government\u2019s budget deficit<\/strong>. Common scenarios that create deficits by reducing revenue and increasing spending include:\n<ul class=\"wp-block-list\">\n<li><strong>A tax structure that undertaxes high-wage earners but overtaxes low-wage earners.<\/strong><\/li>\n\n\n\n<li><strong>Increased spending on programs like Social Security, Medicare, or military spending.<\/strong><\/li>\n\n\n\n<li><strong>Increased government subsidies to targeted industries.<\/strong><\/li>\n\n\n\n<li><strong>Tax cuts that decrease revenue but provide corporations with funds to increase employment.<\/strong><\/li>\n\n\n\n<li><strong>Low GDP, or gross domestic product, results in lower tax revenue.<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>Budget deficits may occur as a way to respond to certain&nbsp;<strong>unanticipated events and policies<\/strong>, such as the increase in defense spending.<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"what-can-be-done-to-manage-fiscal-deficit-and-national-debt-in-india\">What can be Done to Manage Fiscal Deficit and National Debt in India?<\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Fiscal Discipline and Consolidation:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Adhering to fiscal consolidation targets, as outlined in the FRBM Act is crucial.<\/li>\n\n\n\n<li>The government should aim to&nbsp;<strong>gradually reduce the fiscal deficit-to-GDP ratio to ensure sustainable public finances.<\/strong><\/li>\n\n\n\n<li>Implementing prudent fiscal policies, including expenditure rationalisation, revenue enhancement measures, and subsidy reforms,&nbsp;<strong>can help in reducing the reliance on borrowing<\/strong>&nbsp;and mitigating fiscal imbalances.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Enhancing Revenue Mobilisation:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Strengthening tax administration and&nbsp;<strong>compliance to broaden the tax base<\/strong>&nbsp;and improve revenue collection.<\/li>\n\n\n\n<li>Exploring avenues for<strong>&nbsp;diversifying revenue sources,<\/strong>&nbsp;such as introducing new taxes or levies on luxury goods, wealth, or environmental taxes.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Rationalising Expenditures:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Conducting a comprehensive review of government expenditures to identify inefficiencies and prioritise spending in key areas such as healthcare, education, and infrastructure.<\/li>\n\n\n\n<li>Implementing measures to<strong>&nbsp;curb non-essential spending and subsidies,<\/strong>&nbsp;while&nbsp;<strong>ensuring targeted support for vulnerable populations.<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Debt Management Strategies:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Developing a prudent debt management strategy to<strong>&nbsp;optimise borrowing costs and minimise refinancing risks.<\/strong><\/li>\n\n\n\n<li><strong>Diversifying the investor base and sources of financing,<\/strong>&nbsp;including domestic and international markets, to mitigate exposure to market volatility.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Long-Term Structural Reforms:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Undertaking structural reforms aimed at<strong>&nbsp;improving the efficiency and competitiveness of the economy,<\/strong>&nbsp;including labour market reforms,<strong>&nbsp;ease of doing business<\/strong>&nbsp;initiatives, and governance reforms.<\/li>\n\n\n\n<li>Addressing&nbsp;<strong>structural bottlenecks and challenges in sectors<\/strong>&nbsp;such as agriculture, manufacturing, and services to unleash growth potential and enhance fiscal sustainability.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Answer: (d) Creating new money to finance a budget deficit Notes: What Causes a Budget Deficit? What can be Done to Manage Fiscal Deficit and National Debt in India?<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_kad_blocks_custom_css":"","_kad_blocks_head_custom_js":"","_kad_blocks_body_custom_js":"","_kad_blocks_footer_custom_js":"","_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[1,3],"tags":[38],"years":[60],"class_list":["post-1984","post","type-post","status-publish","format-standard","hentry","category-upsc","category-prelims","tag-indian-economy","years-60"],"acf":[],"taxonomy_info":{"category":[{"value":1,"label":"UPSC"},{"value":3,"label":"Prelims"}],"post_tag":[{"value":38,"label":"Indian Economy"}],"years":[{"value":60,"label":"2013"}]},"featured_image_src_large":false,"author_info":{"display_name":"LotusArise","author_link":"https:\/\/lotusarise.com\/qna\/author\/team-lotusarise"},"comment_info":0,"category_info":[{"term_id":1,"name":"UPSC","slug":"upsc","term_group":0,"term_taxonomy_id":1,"taxonomy":"category","description":"","parent":0,"count":1269,"filter":"raw","cat_ID":1,"category_count":1269,"category_description":"","cat_name":"UPSC","category_nicename":"upsc","category_parent":0},{"term_id":3,"name":"Prelims","slug":"prelims","term_group":0,"term_taxonomy_id":3,"taxonomy":"category","description":"","parent":1,"count":1251,"filter":"raw","cat_ID":3,"category_count":1251,"category_description":"","cat_name":"Prelims","category_nicename":"prelims","category_parent":1}],"tag_info":[{"term_id":38,"name":"Indian Economy","slug":"indian-economy","term_group":0,"term_taxonomy_id":38,"taxonomy":"post_tag","description":"","parent":0,"count":225,"filter":"raw"}],"_links":{"self":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1984","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/comments?post=1984"}],"version-history":[{"count":0,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1984\/revisions"}],"wp:attachment":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/media?parent=1984"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/categories?post=1984"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/tags?post=1984"},{"taxonomy":"years","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/years?post=1984"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}