A. Tax and spend creates no new net reserves and no net new deposits. Public paying taxes reduces public Assets -Assets (-deposits) Bank contracts BS making tax payments: -Assets (-reserves) -Liabilities (-deposits) Fed facilitates bank payments to UST via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Treasury increases assets receiving taxes +Assets (+reserves) —-Treasury Spends—- Treasury spending causes a reduction in UST Assets: -Assets (-reserves) Fed facilitates UST payments to banks via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Banks expand their BS when receiving Treasury payments on behalf of the public +Assets (+reserves) +Liabilities (+deposits) Public receiving Gov payment increases Assets +Assets (+deposits) UST Tax and spend: -D -R +R -R +R +D = 0 Ravel will show the same. —- B. Deficit Spending creates no new net Reserves and no new net deposits when the new bonds are sold to the public. Treasury expands their BS selling bonds: +Assets (+reserves) +Liabilities (Bonds) Public does an asset swap buying bonds: -Asset (-deposits) +Assets (+bonds) Bond buyer’s bank contracts their BS when their customers buy bonds: -Assets (-reserves) -Liabilities (-deposits) —-Treasury Spends Bond Sale Proceeds—- Treasury spending causes a reduction in UST Assets: -Assets (-reserves) Fed facilitates UST payments to banks via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Banks expand their BS when receiving Treasury payments on behalf of the public +Assets (+reserves) +Liabilities (+deposits) Public receiving Gov payment increases Assets +Assets (+deposits) UST Borrow/Bond sale and deficit spend: -D -R +R +Bond -R +R +D = +B No net new reserves or net new deposits, but public equity increases by receiving new deposits equal to the bond, and the Gov equity decreases by amount of bond.