Which of the following is likely to be the most inflationary in its effects? ​

The answer is D. Creating new money to finance a deficit adds to the money supply with no matching rise in output or saving, so it pushes up aggregate demand directly. This is deficit monetisation, where the central bank effectively funds government spending with freshly created money.

• A (repayment of public debt): the government pays back creditors, which reduces or at least does not expand money supply. It is, if anything, mildly disinflationary.
• B (borrowing from the public): money moves from private hands to the government. Spending can still raise demand, but purchasing power is transferred rather than created, so the effect is milder.
• C (borrowing from banks): bank credit can expand money through the multiplier, but this depends on banks' lending capacity and credit demand, so the effect is less direct than printing money.

Core concept: monetised deficit versus debt-financed deficit. Mains angle: the FRBM framework and limits on direct RBI financing of the government (through the RBI Act and Ways and Means Advances arrangements) exist precisely to curb this channel. The debate over fiscal dominance and inflation is a frequent essay and GS-III theme.

Trap: aspirants pick C because bank borrowing 'creates' money through credit. The question asks for the most direct inflationary effect, which is new money issuance.