Which one of the following is likely to be the most inflationary in its effect?

The correct answer is D, creating new money to finance a budget deficit. When the government's gap is covered by fresh money printed by the central bank (monetised deficit), high-powered money rises directly. Spending then pushes up demand without any matching fall in private spending or savings, so prices rise the most.

• A is wrong. Repaying public debt withdraws money from circulation or leaves it unchanged, so it is not inflationary.
• B is wrong. Borrowing from the public transfers money the public already holds to the government. No new money is created, so the effect is mostly neutral, with a possible crowding-out effect on private investment.
• C is less inflationary than D. Bank borrowing does expand the money supply through deposit creation, but the expansion is limited by reserve requirements and the credit multiplier, and it is slower and less direct than printing money.

The core concept is monetised deficit and the link between fiscal policy and money supply. For Mains (GS-III, macroeconomy), this connects to fiscal dominance and central bank independence. India discontinued the ad hoc treasury bill system that monetised deficits in 1997, and the FRBM Act 2003 further limits such financing.

Trap: Many aspirants treat all government borrowing from banks as equivalent to printing money. The sharper point is that only central bank money creation adds directly to high-powered money.