Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

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 deposits

The U.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 company’s 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