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GS Paper IUPSC Prelims 2021
Banking & Financial System
Question No. 108Interactive Test Mode
00:00
+2-0.66

Q108. Which one of the following is likely to be the most inflationary in its effects?

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

Select the correct option below (or cross out options to eliminate)
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Official Answer Key & Detailed Solution

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Official UPSC Answer KeyUPSC Prelims 2021 • Indian Economy

Correct Answer: Option (D) — Creation of new money to finance a budget deficit

Concept & Option Breakdown

Standard Reference Verified
  • Option (d) is correct: Deficit financing through the creation of new money (monetisation of deficit) expands reserve money directly, increasing the overall money supply without any commensurate increase in aggregate output, making it the most inflationary measure.
  • Borrowing from the public or commercial banks merely transfers or absorbs existing purchasing power rather than injecting brand new high-powered money.
Elimination Heuristic & Exam Approach

Evaluate the net addition to total liquidity: Borrowing redistributes existing funds in circulation, whereas 'creation of new money' permanently injects fresh unbacked liquidity into the financial system.

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Question Specifications & Syllabus Mapping

Examination & YearUPSC Civil Services Preliminary Examination 2021 (Q108)
Paper & Marking SchemeGS Paper I • 2 Marks (-0.66 Negative for incorrect response)
Syllabus Subject & TopicIndian Economy → Banking & Financial System
Official Answer KeyOption (D) — Creation of new money to finance a budget deficit

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Frequently Asked Questions — UPSC Prelims 2021 Q108

What is the official answer for UPSC Prelims 2021 GS Paper I Question 108 (Indian Economy)?

The official UPSC answer key for this 2021 Indian Economy (Banking & Financial System) question is Option (D): "Creation of new money to finance a budget deficit". Correct attempts carry 2 Marks with -0.66 Negative penalty for wrong answers.

Which UPSC Prelims syllabus topic does this 2021 question belong to?

This question belongs to GS Paper I under the subject "Indian Economy" and micro-topic "Banking & Financial System". You can explore all repeated questions from Banking & Financial System in Acme AI's 3D Prelims PYQ Realm or practice 50 full-length and sectional tests in the APT Prelims Test Series.

How can I solve this Banking & Financial System UPSC Prelims question using option elimination?

Evaluate the net addition to total liquidity: Borrowing redistributes existing funds in circulation, whereas 'creation of new money' permanently injects fresh unbacked liquidity into the financial system.

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