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) both A and B

Question

Quizplus · Accepted Answer

When the government deficit is financed by an increase in bond holdings by the public, it does not affect the monetary base (A), and there is no direct effect on the money supply (B). However, the purchase of bonds increases the reserves of the banking system, which can potentially be used to create new loans and increase the money supply. Therefore, the correct answer is D, as both A and B are true.

If the Government Deficit Is Financed by an Increase in Bond