Question

Why can excessive deficit financing be harmful for an economy?

Options

• It always reduces unemployment

• It leads to a permanent fall in taxes

• It can cause high inflation by increasing money supply too much

• It permanently increases national income

Answer 1

It can cause high inflation by increasing money supply too much

Explanation: 
In deficit financing, the government often issues more currency to meet excess expenditure.
If used excessively, this raises the money supply sharply and can create inflationary pressure in the economy.