The financing of government spending by issuing debt
A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question

Quizplus · Accepted Answer

Issuing debt to finance government spending does not directly change the monetary base because it involves swapping one type of government liability (bonds) for another (currency or reserves). The monetary base consists of currency in circulation and reserves held by banks at the central bank, and these are not directly affected by the act of issuing debt.

The Financing of Government Spending by Issuing Debt