If the Treasury finances an expenditure by borrowing from banks with excess reserves, the money supply will
A) remain unchanged.
B) rise by an amount equal to the expenditure.
C) rise by a multiple of the expenditure.
D) fall by a multiple of the expenditure.

Question

Quizplus · Accepted Answer

When the Treasury borrows from banks with excess reserves, the banks lend out the excess reserves, increasing the money supply by an amount equal to the expenditure. This is because the borrowed funds enter circulation and increase the amount of money available in the economy. Therefore, the correct answer is B.

If the Treasury Finances an Expenditure by Borrowing from Banks