Inflationary Effects of Fiscal Policy

Creating new money to finance a budget deficit is the most inflationary because it directly increases the money supply without any corresponding increase in goods and services, leading to demand-pull inflation. Option (a) repayment reduces money supply and is deflationary. Option (b) borrowing from the public transfers existing money from public to government with no net increase in money supply. Option (c) borrowing from banks increases money supply but less dramatically than creating new money. When new money is created (printing currency or RBI advances), it causes the most direct and potent inflationary effect as it puts more purchasing power in the economy without corresponding production increase.

Answer: (d).