Inflationary Impact of Deficit Financing Options

Financing a budget deficit through the creation of new money (deficit financing/monetization of deficit) increases the absolute monetary base and high-powered money in the economy without a corresponding increase in output. This directly expands the aggregate demand and money supply, making it highly inflationary compared to domestic borrowing options that merely transfer existing money from private hands to the government. > Printing new currency to fund fiscal gaps directly triggers classic demand-pull inflation by expanding aggregate money supply. Answer: (d).