If the government deficit is financed by an increase in bond holdings by the public ________.
A) there is no effect of the monetary base
B) there is no effect on the money supply
C) the money supply increases
D) A and B only

Question

Quizplus · Accepted Answer

When the government deficit is financed by an increase in bond holdings by the public, there is no effect on the monetary base (option A) and no direct effect on the money supply (option B). However, if the public purchases the bonds with money they already have, it reduces the amount of money in circulation, leading to a decrease in the money supply. Therefore, options A and B are incorrect individually, but collectively they represent the effect of financing the government deficit through an increase in bond holdings by the public.

If the Government Deficit Is Financed by an Increase in Bond