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Increasing money supply

Discussion in 'CB2' started by VSA_88, Sep 17, 2019.

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  1. VSA_88

    VSA_88 Active Member

    Hi,
    Can anyone help me understand the difference between a T-Bill and a government bond when trying to increase the money supply?
    My understanding is that T-Bills are short term and sold at a discount, allowing the holder the make a return at the end of the term. For a bond, these are longer term, offer a coupon and redeemed at par. Is that correct?

    However, in terms of monetary policy, I'm not understanding why one will increase the money supply and why the other does not. (For reference, an example question is in the course notes, page 9, ch15, I'll attach a snapshot here).

    Any help would be massively appreciated.

    Thanks.
     

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    VSA_88, Sep 17, 2019
    #1
  2. Gresham Arnold

    Gresham Arnold ActEd Tutor Staff Member

    Hi Amandeep, yes your summary of T-bills and government bonds looks fine.

    The reason for the potentially different impact on the money supply is due (at least according to CB2) to differences in liquidity. The CB2 textbook regards T-bills as liquid assets but notes that government bonds are less liquid. The impact of this is explained on p577-578 of the CB2 textbook 'Economics'.

    Best wishes

    Gresham
     
    Gresham Arnold, Sep 18, 2019
    #2

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