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    Question

    Consider the following statements regarding Deficit

    Financing in India : Deficit financing is a method where the government borrows from external agencies only, not from internal sources.   High levels of deficit financing can lead to inflationary pressures and devaluation of the currency.   The Fiscal Responsibility and Budget Management (FRBM) Act sets targets for reducing the fiscal deficit and controlling public debt.   Which of the statements given above are correct ?  
    A 1 and 2 only Correct Answer Incorrect Answer
    B 2 and 3 only Correct Answer Incorrect Answer
    C 1 and 3 only Correct Answer Incorrect Answer
    D 1, 2, and 3 Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Explanation:  

    • Statement 1 is incorrect : Deficit financing can come from both internal sources (such as borrowing from RBI) and external sources (like issuing bonds to foreign investors).  
    • Statement 2 is correct : High deficit financing increases money supply, potentially causing inflation.  
    • Statement 3 is correct : The FRBM Act was introduced to maintain fiscal discipline and curb excessive government borrowing.  

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