Question : Deficit financing means the government borrows money from the ____.
Option 1: International Monetary Fund
Option 2: Ministry of Finance
Option 3: Reserve Bank of India
Option 4: World Trade Organisation
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Correct Answer: Reserve Bank of India
Solution : The correct answer is the Reserve Bank of India.
When the government spends more than it collects in tax money, it faces a deficit. Through RBI, the government borrows money or creates new money to make up the deficit between its spending and revenue. This is known as deficit financing. The government has the option of using its cash held in RBI for withdrawals, instructing the RBI to create fresh currency notes, or borrowing money from the general public in the form of bonds and other assets.
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