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

1. A

   Repayment of public debt

   Repaying public debt. Extinguishes a liability; not new high-powered money.

2. B

   Borrowing from the public to finance a budge deficit

   Borrowing from the public. Transfers deposits; relatively less inflationary.

3. C

   Borrowing from the banks to finance a budget deficit

   Borrowing from banks. Can expand credit, but still not printing.

4. D

   Creation of new money to finance a budget deficit

   Creating new money to finance the deficit. Monetisation — the most inflationary of the four.

Summary. Official key is (d). Financing a deficit by creating new money (monetisation) is the most inflationary route. Public borrowing recycles existing saving; bank borrowing is in between; repayment is not stimulus of that kind.