How can a deficit be financed?
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A deficit can be financed in two ways:
- Monetary Expansion: It means printing new notes to the extent of deficit. It involves government borrowings from the Central bank (Reserve Bank of India) through the issue of the treasury bills to the Central Bank. The Central Bank purchases the treasury bills in return for cash (procured by printing new notes). The government use this cash to finance the deficit.
- The second method of financing the deficit is borrowing by the government from the public through market loans etc.
- By borrowing from abroad (rest of the world).
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