Deficit financing happens when a government spends more money than it earns from taxes and other income sources. To cover this gap, the government borrows money from central banks, commercial banks, or foreign lenders.

This process usually has several effects:

• It increases the total money supply in the economy.
• It can lead to inflation (rising prices) if the extra money is not balanced by an increase in the production of goods and services.
• Governments typically use it to pay for large projects like infrastructure or economic development.

While useful for growth, this strategy carries risks, such as a higher national debt and potential instability in the overall economy.