Question : The government's budget deficit can be financed through ____________.
Option 1: External grants
Option 2: Fiscal discipline
Option 3: Monetary policy
Option 4: Domestic borrowing
Correct Answer: Domestic borrowing
Solution : The correct answer is (D) Domestic borrowing.
When a government has a budget deficit, meaning its spending exceeds its revenue, it needs to finance the shortfall by borrowing money. Domestic borrowing refers to the government borrowing funds from domestic sources within the country. This can include issuing government bonds or treasury bills to individuals, banks, financial institutions, or other entities within the country.
By borrowing domestically, the government can tap into the savings and investments of its own citizens and institutions, which helps cover the deficit and fund its spending obligations. Domestic borrowing is a common method for governments to finance their budget deficits, as it allows them to manage their debt within the country's financial system.
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