Deficit financing and inflation: Identify the condition under which inflationary pressure from deficit financing can be checked in an economy. Focus on the supply response and how additional demand is absorbed without sustained price rise. Choose the correct condition.

Given data

• Deficit financing (monetized shortfall) usually fuels demand and hence inflation.
• We must find when that inflationary effect can be checked.

Concept / Approach
Deficit financing raises aggregate demand. Inflation results if supply cannot keep pace. If the deficit funds productive investment that rapidly expands output (especially of mass-consumption goods), the rightward supply shift offsets demand pressure → muted price rise.

Step-by-step reasoning
• If capital outlay adds capacity soon (e.g., food, basic consumer goods), the additional supply absorbs demand → prices stabilize.• If used for current expenditure (wages, subsidies) with no immediate output gain, demand rises with little supply response → prices rise.• Full-employment with inelastic supply or import restrictions both worsen inflation by constraining supply.

Common pitfalls

• Assuming any investment curbs inflation; timing and sector (supply responsiveness) matter.
• Believing monetary expansion is non-inflationary regardless of supply conditions.

Final Answer
Use the deficit for productive capital outlay that quickly expands output so aggregate supply rises with demand.