CA Foundation · Business Economics · Public Finance
A government borrows Rs 500 crore from the public and uses the money to repay an equal amount of old loans falling due, without any new spending. This is best described as:
This is refunding, a method of debt redemption in which new loans are raised to repay maturing old loans. Total public debt stays the same, only its composition and maturity change. No new money is printed and no surplus arises from the transaction.
- ADeficit financing through printing money
- BDebt redemption by refunding, i.e. conversion of old debt into new debtCorrect
- CA budgetary surplus
- DCapital receipt that reduces the fiscal deficit
Explanation
Raising fresh loans to pay off maturing loans is refunding, a method of debt redemption. It only replaces old debt with new debt and leaves total debt unchanged. It is not money creation, and since the borrowing is a liability it does not produce a surplus.
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