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

Answer: D. CREATION OF NEW MONEY to finance a budget deficit is the most inflationary. There are multiple ways a government can finance a budget deficit, and each has a different effect on the money supply and inflation. (D) CREATION OF NEW MONEY (deficit monetisation, also called 'printing money' or earlier known as 'ad hoc treasury bills'): The central bank directly funds government deficit by creating fresh money. This DIRECTLY EXPANDS the money supply (high-powered money / M0), and through the money multiplier, broader monetary aggregates (M3) expand multifold. Excess money chasing the same goods causes the strongest demand-pull inflation. This is the most inflationary option. (C) Borrowing from BANKS: This is partially inflationary. Banks may have to liquidate other assets or expand their balance sheets, leading to some monetary expansion. The intermediate inflation impact depends on whether banks have surplus reserves or have to call back loans to others (crowding out). (B) Borrowing from THE PUBLIC: This is the LEAST inflationary financing option because the government is simply REDISTRIBUTING existing money from public savings to public spending. The money supply is unchanged (the government bond is just a transfer of claim). However, it can cause CROWDING OUT of private investment via higher interest rates. (A) REPAYMENT OF PUBLIC DEBT: This is actually DEFLATIONARY or neutral. The government is PAYING DOWN borrowings, reducing money in circulation if repaid out of taxes. Not inflationary. India ABOLISHED automatic monetisation in 1997 through an agreement between RBI and the government, specifically because of its inflationary impact, replacing it with the Ways and Means Advances regime with limits. Source: NCERT Class 12 Macroeconomics — Government Budget / Monetary Economics.