If the government finances spending by issuing debt to the public, the monetary base and money supply will:

Question

BlackTom AI · Accepted Answer

Issuing debt to the public means the Treasury sells bonds to private savers (not the central bank), so the central bank’s liabilities are unchanged and there is no net creation or destruction of high-powered money.

1) Relevant knowledge points and concepts
- Monetary base (high-powered money) = currency in circulation + bank reserves at the central bank. It is directly controlled by central bank operations (open-market operations, lending to banks, etc.).
- Money supply (e.g., M1) = currency + checkable deposits (broader aggregates include other deposits). Fiscal actions that only swap one government liability for another (or swap private assets) do not necessarily change the monetary base or money supply unless the central bank is involved.
- Financing by issuing debt to the public (selling Treasury bonds to private agents) is a fiscal, not a monetary, operation.

2) Step-by-step reasoning
- Step A: The Treasury sells bonds to private investors. Private buyers pay for bonds by reducing their bank deposits (or currency) and the banks transfer reserves to the Treasury’s account at the central bank. That temporarily reduces private deposits and bank reserves, and increases the Treasury’s account at the central bank.
- Step B: The Treasury then spends those proceeds: when the Treasury pays salaries/contracts, the Fed debits the Treasury’s account and credits commercial banks’ reserves; commercial banks credit recipients’ deposit accounts. That restores reserves and deposits to the private sector.
- Net effect after both steps: bank reserves and currency end up at their prior levels, and private-sector deposits return to prior levels (aside from asset composition shifts between holding bonds versus deposits). Thus neither the monetary base nor the money supply experiences a net change.

3) Intermediate calculations/flows (illustrative)
- Suppose Treasury sells $100 of bonds to public:
  - Private deposits fall by $100; Treasury account at Fed +$100; bank reserves fall by $100.
- Treasury spends $100:
  - Treasury account at Fed -$100; banks’ reserves +$100; recipients’ deposits +$100.
- Net change: reserves 0, deposits 0, monetary base 0.

4) Why the correct answer is correct
Because the entire operation is an asset swap between the government and the public with the central bank passively settling payments; no new central-bank liabilities are created or destroyed permanently. Only central-bank actions (e.g., Fed buying bonds) would change the monetary base.

5) Why other options are incorrect
- (a) increase; increase: would require the central bank to purchase bonds or directly finance spending (monetization), which is not happening here.
- (b) decrease; increase: inconsistent—reserves would only permanently decrease if the Treasury permanently withdrew funds from the banking system without spending them back, and money supply would not then increase.
- (c) increase; decrease: contradicts logic—monetary base doesn’t rise when bonds are sold to the public, and money supply wouldn’t necessarily fall.

6) Conclusion
Therefore, the monetary base and the money supply do not change. Final answer: d. not change; not change.

If the government finances spending by issuing debt to the public, the monetary base and money supply will:单项选择题

类似问题

If banks choose to increase their excess reserves, the money supply will:

The money supply is determined by:

Which is NOT in M2?

Question at position 19 The money supply is related to expected deposit outflows, and is related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positively

Question at position 9 Decisions by about their holdings of currency and by about their holdings of excess reserves affect the money supply. banks; depositors depositors; borrowers depositors; banksborrowers; depositors

Question at position 11 The money supply is related to expected deposit outflows, and is related to the market interest rate.negatively; negativelypositively; positivelypositively; negatively negatively; positively

Question at position 8 Decisions by about their holdings of currency and by about their holdings of excess reserves affect the money supply. borrowers; depositorsdepositors; borrowers banks; depositors depositors; banks

Question at position 8 If the required reserve ratio is 10%, currency in circulation is $300 billion, checkable deposits are $900 billion, and excess reserves total $1 billion, then the money supply is ________ billion. $2700$1200$1800$3000$3100

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单