Suppose the Treasury sells $10 billion of newly issued Treasury bills to the Fed and uses the proceeds to increase government spending by $10 billion.How will this affect the money supply and the national debt?

Question

Quizplus · Accepted Answer

When the Treasury sells $10 billion of newly issued Treasury bills to the Fed, the Fed will pay for them with newly created money. This will increase the money supply as the government spending increases. However, the national debt will also increase as the Treasury has borrowed $10 billion from the Fed, which needs to be paid back with interest. Therefore, both the money supply and the national debt will increase.

Suppose the Treasury Sells $10 Billion of Newly Issued Treasury