General Knowledge - Indian Economy - Discussion

Guys answer A is write because deficit financing is process in which RBI prints more notes when govt has shortage of fund or money its just like more of money in market that leads inflation raise in general price level.

But price arises because people have more of money than they had. So they are demanding more of goods and services. But govt can check inflation if it would be able to produce the goods in same ratio by demand has increased but this impossible in short run because monetary effects in an economy are instant i.e. Inflation will rise definitely in short run.

Why b is included ?

As per my view answer should be A. Because if supply increases sufficiently than demand, then only inflation can be checked.

Option(C) is also understandable!

If all the government expenditure goes to pay for it's loans then there is no increase in the aggregate demand right?

(Considering that the loans are taken from large banks and foreign institutions....not domestic bondholders).

Only aggregate demand will lead to further inflation. Answer should be from what is apparent and conditions should not be considered if they are not given.

Answer should be (A).

How increase in aggregate demand curb inflation when aggregate supply does not increases?

If demand of every sector increases then how the output will improve and thus how the inflation will go down ?

I think answer should be A only.

Aggregate demand includes demand of all divisions combined for entire year. So, it is obvious that demand of every sector increase as compared with previous year in order to improve the output.

Why B?

Due to deficit financing aggregate demand will raise so the government needs to increase the aggregate supply to avoid inflation. So why only aggregate demand will increase?

Thanks for the clear explanation.