If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.
A)increase;increase
B)increase;decrease
C)decrease;increase
D)not change;not change

Question

Quizplus · Accepted Answer

When the government finances its spending by issuing debt to the public, it is essentially borrowing from the public by selling government bonds. This action does not directly affect the monetary base (the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank's reserves). The monetary base remains unchanged because this process involves swapping bonds for money among the public and does not involve the central bank altering the amount of reserves held by banks or currency in circulation. Similarly, the money supply does not change directly as a result of this action; it merely involves the public exchanging money for government bonds, without altering the total amount of money in circulation.

If the Government Finances Its Spending by Issuing Debt to the Public,the