If the government deficit is not financed by increased bond holdings by the public: A. the monetary base falls, but due to excess reserves, the money supply rises. B. the monetary base and the money supply decrease. C. the monetary base and the money supply increase. D. there is no effect on the monetary base or the money supply

Question

Social Studies

Dewey

1 June, 18:30

If the government deficit is not financed by increased bond holdings by the public: A. the monetary base falls, but due to excess reserves, the money supply rises. B. the monetary base and the money supply decrease. C. the monetary base and the money supply increase. D. there is no effect on the monetary base or the money supply

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Answers (1)

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King Wilkinson · Answer 1

If the government deficit is not financed by increased bond holdings by the public, the monetary base and money supply will increase.

Option: (B)

Explanation:

The monetary base is the total amount of coins and notes present in the head bank of a country and the money supply is the total amount of its own currency present in it's reserve. Whenever a bond (loan) is given to the public, it decreases the currency reserve. To maintain a stable economy, the monetary base and money supply must be balanced as these are dependent on the supply of goods and services. Also, this requires timely payment of 'bond holdings' by the public.