Question : Fiscal deficit becomes inflationary when it is corrected through
Option 1: Borrowings from foreign countries
Option 2: Borrowings from Reserve Bank of India
Option 3: Borrowings from International Organizations
Option 4: Borrowings from General Public
Correct Answer: Borrowings from Reserve Bank of India
Solution : The correct answer is (b) Borrowings from Reserve Bank of India.
Fiscal deficit refers to the difference between a government's total expenditure and its total revenue in a given period. When the government needs to finance its fiscal deficit, it has several options, including borrowing from various sources.
Among the options listed, borrowing from the Reserve Bank of India (RBI) is the one that can potentially lead to inflation. When the government borrows from the RBI to finance its fiscal deficit, it essentially increases the money supply in the economy. This increase in the money supply without a corresponding increase in the production of goods and services can lead to an excess of money chasing a limited supply of goods, resulting in inflationary pressures.
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