If the Fed sells an asset, subsequently, both the monetary base and bank reserves drop, and money supply potentially shrinks. Moreover, if the Fed acquires a liability in Equation 6, then the monetary base, bank reserves, and the money supply all fall. On the other hand, if the Fed reduces a liability, subsequently, both the monetary base and bank reserves rise, and the money supply potentially increases. Consequently, many things alter the Feds balance sheet. Unfortunately, the Fed cannot control many items on its balance sheet. For example, the Fed has no control over the Treasury deposits, the float (CIPC DACI), gold certificates, SDRs, and foreign government deposits. As these items can change, the Fed must use open-market operations to maintain a stable monetary base. Does U.S. Treasury Affect the Monetary Base? The U.S. federal government has experienced persistent budget deficits for the last 40 years because the U.S. government spends more than what

Government finances budget deficits in three ways. First, the U.S. government can decrease its spending, which is not politically popular. People demand benefits and social programs from their government. Second, the U.S. government can raise taxes, which could anger the taxpayers. Finally, the U.S. can sell U.S. government securities. Thus, the U.S. government chose to finance budget deficits by selling more U.S. government securities. Could the U.S. federal government affect the monetary base by financing budget deficits? For example, the U.S. government increases taxes; you pay a total of $2,000 in taxes, and you 151 send the U.S. government a check for $2,000. We record the T-account transactions below for you, your bank, the Fed, and the U.S. Treasury Department. You Assets Liabilities $2,000 Deposit $2,000 Taxes due Your Bank Assets Liabilities $2,000 Reserves $2,000 Deposits The Federal Reserve Assets Liabilities $2,000 Reserves +$2,000 U.S. Treasury deposi

S. Treasury Department Assets Liabilities $2,000 Taxes due +$2,000 Deposits at the Fed The U.S. Treasury, subsequently, spends your $2,000 to buy more paper for a government agency. A company receives $2,000 and deposits the funds into the companys bank account. Although you paid higher taxes, the U.S. government returns your money to the economy. Thus, when a government raises taxes and immediately spends it, the taxes have no impact on the monetary base and money supply. Nevertheless, the government does transfer funds from one party to another. For the next example, the U.S. Treasury finances a budget deficit by selling T-bills. You buy a $20,000 T-bill. We record the T-account transactions below for you, your bank, the Fed, and U.S. Treasury. You Assets Liabilities $20,000 Deposit + $20,000 T-bill Your Bank Assets Liabilities $20,000 Reserves $20,000 Deposits 152 The Federal Reserve Assets Liabilities $20,000 Reserves +$20,000 U.S. Treasury deposits The U.S. Treasury Dep

S. T-bill The U.S. Treasury collects your $20,000 and buys something with it. When the Treasury pays for a product or service from the public, then the U.S. government pays $20,000 to a company,