Answer: (4) Creation of new money to finance a budget deficit
Explanation:
Let's analyze each option in terms of its potential to cause inflation:
Borrowing from the public to finance a budget deficit:
- Borrowing from the public involves using existing money within the economy, which doesn't directly increase the money supply. Therefore, it is not highly inflationary.
Increase in expenditure on public projects:
- While increased public spending can lead to inflation by raising demand in the economy, its effect is often moderated by the time it takes for these projects to complete and impact the economy. It can be inflationary but not the most.
Devaluation of a currency:
- Devaluation can cause inflation by making imports more expensive, which can increase the overall price level. However, its inflationary impact is indirect and typically less severe compared to direct increases in the money supply.
Creation of new money to finance a budget deficit:
- This is the most inflationary option. When new money is created and pumped into the economy without a corresponding increase in goods and services, it increases the money supply, leading to higher demand and, consequently, higher prices (inflation). This is often referred to as "printing money" and is the most direct way to cause inflation.
Conclusion:
The most inflationary option is (4) Creation of new money to finance a budget deficit.
