#1
When the government buys/sells bonds is that fiscal policy or monetary policy? I googled it but it just confused me about this even more.

I have an econ exam tomorrow so if you could answer this that would be great
cat
Last edited by guitarxo at Dec 15, 2009,
#2
Definitely not fiscal policy. Most of the time, a government will sell bonds when it needs funding so I guess you can say it's part of the monetary policy. But it's not exactly an appropriate term either.
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#3
Monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.
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#5
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thanks!!


No Problem
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#6
I could be wrong but this sounds like a trick question.

Both policies deal with bonds and the fiscal deficit. A monetary policy can change the total amount of money in circulation and will use a central bank to buy or sell bonds. A fiscal policy, however, involves the government spending, or borrowing in this case, money which results in a deficit. This deficit is then funded by issuing bonds.

If you had to choose between the two my guess would go for Monetary.
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#7
Quote by carr4600
Monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.


I wouldn't say buying or selling bonds translates into the variation of the monetary base. Central banks can alter the amount of currency in the economy when it is needed, they don't need to engage in bonds transactions to do so. And such actions are now outdated, anyway, nobody directly plays with the monetary base anymore, it causes too much inflation.

Modulating the monetary base can be a tool for an interventionist monetary policy, but a government buying or selling bonds has nothing to do with monetary base, at least not directly. It has more to do with a government's debt and need for funds.
---

"L'esclave parfait est celui qui croit être libre."

---
#8
Quote by Astyan
I wouldn't say buying or selling bonds translates into the variation of the monetary base. Central banks can alter the amount of currency in the economy when it is needed, they don't need to engage in bonds transactions to do so. And such actions are now outdated, anyway, nobody directly plays with the monetary base anymore, it causes too much inflation.

Modulating the monetary base can be a tool for an interventionist monetary policy, but a government buying or selling bonds has nothing to do with monetary base, at least not directly. It has more to do with a government's debt and need for funds.


big words
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#9
Quote by Astyan
I wouldn't say buying or selling bonds translates into the variation of the monetary base. Central banks can alter the amount of currency in the economy when it is needed, they don't need to engage in bonds transactions to do so. And such actions are now outdated, anyway, nobody directly plays with the monetary base anymore, it causes too much inflation.

Central banks must have foreign exchange reserves in order to operate open market operations. Bonds are still being issued today and are definitely not outdated. Any instrument used in the monetary policy will have at least some adverse affect on the economy.
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#10
Quote by carr4600
big words

And that's just economics. Wait until you hit auxiliary verbs and adjectival agreements in English.
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#11
Quote by marchoso
Central banks must have foreign exchange reserves in order to operate open market operations. Bonds are still being issued today and are definitely not outdated. Any instrument used in the monetary policy will have at least some adverse affect on the economy.


I talked about the direct alteration of the amount of currency in the economy when I said "outdated", I know bonds aren't of course. My point is that a government sells bonds when it needs funds, not as part of a monetary policy (even if it can potentially have an effect on the economy).

My last lesson in economics was like three years ago though, could have missed something. But I'm almost sure bonds are not that much of a tool for a monetary policy, contrary to tuning interest rates up or down and injecting money in the economy through big construction projects for example.
---

"L'esclave parfait est celui qui croit être libre."

---
Last edited by Astyan at Dec 15, 2009,
#12
Quote by Astyan
I talked about the direct alteration of the amount of currency in the economy when I said "outdated", I know bonds aren't of course. My point is that a government sells bonds when it needs funds, not as part of a monetary policy (even if it can potentially have an effect on the economy).

My last lesson in economics was like three years ago though, could have missed something. But I'm almost sure bonds are not that much of a tool for a monetary policy, contrary to tuning interest rates up or down and injecting money in the economy through big construction projects for example.

When bonds are sold the effect is not potential, it is concrete and sincere. When the government sells a bond the amount of money in circulation is reduced and then the government must pay interest to its lenders. Simple economy rules state that the more money the government borrows, the more taxes we end up paying in order to meet the interest of said bonds. The interest rate will then follow in its footsteps. In fact, the price of money is the interest rate. When money becomes scarcer, interest rates rise.

When the economy tanks because of this scarcity, the Federal Reserve cuts interest rates. This makes money cheap again and the economy is stimulated. When the opposite occurs, rates are raised to stabilize the economy.

Bonds are normally part of the mix.
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Last edited by marchoso at Dec 15, 2009,
#13
Quote by marchoso
When bonds are sold the effect is not potential, it is concrete and sincere. When the government sells a bond the amount of money in circulation is reduced and then the government must pay interest to its lenders. Simple economy rules state that the more money the government borrows, the more taxes we end up paying in order to meet the interest of said bonds. The interest rate will then follow in its footsteps. In fact, the price of money is the interest rate. When money becomes scarcer, interest rates rise.

When the economy sags because of this scarcity, the Federal Reserve cuts interest rates. This makes money cheap again and the economy is stimulated. When the opposite occurs, rates are raised to stabilize the economy.

Bonds are normally part of the mix.


Agreed.

My point is still valid though. What you described is the consequence of a government having to borrow in order to get funds. But while it does have an effect on the monetary base and interest rates, issuing bonds isn't part of a traditional monetary policy. In other words, a government won't use bonds on purpose as a tool to achieve the goals of its monetary policy, it will come in support as a mean to get money at best. That's what I remember at least, but I think the OP's question is answered by now.
---

"L'esclave parfait est celui qui croit être libre."

---
#14
Quote by Astyan
Agreed.

My point is still valid though. What you described is the consequence of a government having to borrow in order to get funds. But while it does have an effect on the monetary base and interest rates, issuing bonds isn't part of a traditional monetary policy. In other words, a government won't use bonds on purpose as a tool to achieve the goals of its monetary policy, it will come in support as a mean to get money at best. That's what I remember at least, but I think the OP's question is answered by now.

Double agreed on all fronts.
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#15
Yep my question was definitely answered, and thank you so much to all of you, this really cleared everything up!
cat