How does the purchase of gilts by the banks reduce the money supply? Maybe its something obvious but i am not getting the catch!
When the banks buy gilts they hand over cash to the Bank of England. They therefore have less cash to lend out, resulting in a smaller monetary base. Remember that the monetary base consists of notes and coins in circulation outside of the central bank, ie notes and coins held by firms, households and the banking sector.
Then why does the purchase of treasury bills increase the money supply? Even here bank will have to give out cash, isnt it?
sounds inconsistent doesn't it. Is the second one used in a context where the central bank is buying bank bills, rather than investors buying them?
In the topic- changes in money supply, under the point public deficit(pg 16 of the chap 18 course notes) Point(ii) says if banks buy treasury bills the money supply increases as they can be used for credit creation, And point (iv) says if banks buy gilts money supply reduces. My question is that in both cases it has to give up on cash to purchase.then why money supply increases in(ii) and reduces in (iv)?
