What is the effect of deficit financing on economy?

Correct answer: Increase in money supply

Explanation: Deficit financing means meeting excess government expenditure over revenue by borrowing from the central bank or printing new currency. This process increases the money supply in the economy, as additional currency is injected without corresponding production. While it may boost growth in the short run, excessive deficit financing can lead to inflationary pressures, reduce the value of money, and create fiscal imbalances. Hence, it is considered a double-edged tool of public finance.