Increased PSBR, static money supply?

I thought I'd got the hang of this but there appears to be contradictory information in the core reading:

Q 14.26 states that increasing a PSBR by selling securities leaves the money supply unchanged due to the cancelling effects. Below the question it also states that this leaves the LM curve unchanged.

Q 16.20 states that selling gilts takes money out of circulation affecting the LM curve.

Perhaps I've got the wrong end of the stick, can anyone help with this??

 

If the central bank sells securities than yes the money supply is reduced.

But this isn't contradictory to the first point. It is not well explained in the notes.

Just like how the money supply is actually reduced by selling securities makes no sense unless you look further into it.

Basically by running a PSBR the extra government expenditure is counted as increasing the money supply because it is seen as new money entering circulation. They can either pay for this by printing money or selling securities. If they sell securities to fund this then this increase is offset.

That is basically the gist of it. I am not sure how clear/coherent that is but if you want me to go into it more just ask.

I can't wait to get this exam over also!

 

Thanks for the response Fiend, and in my other thread. I'm still a little confused though, perhaps my question wasn't set out clearly as q.16.20 is also considering an increase in gov expenditure.

I see how selling Gilts reduces the money supply and how increasing government expenditure increases it and the net effect would be for it to be unchanged, but question 16.20 considers the same situation where the government increases the PSBR by selling gilts and suggests in the answer that the net effect is to take money out of circulation and shift the LM curve to the left?

 

Oh ok sorry misunderstanding from me.

I don't have my notes here to check what they said. Maybe the question was slightly different?

But if that isn't the case then 16.20 is wrong - it wouldn't be the first mistake in the notes

Just ignore it!

 

No problem, my post wasn't clear unless you referenced the questions directly.

I'll have to erase this discovery from my memory!

Best of luck to all taking this on Tuesday.