The differences between the federal resever and the treasury 1. The treasury or

Question

The differences between the federal resever and the treasury

1. The treasury or federal reserver

2.does or does not

3. issues or sells

4. increases, decreases, does not change

5. The treasury or federal reserve

6. does or does not

7. sells or issues

8. does not change,increases, decreases

Fill in the blanks in the following table to indicate differences between the U.S. Treasury and the Federal Reserve. Institution I Institution II finances budget deficits. loans funds to the banking system. 2. 3. 4. Sells newly issued government bonds. It When it- 2. 3. 4, It creates money out of thin air. It a control the money supply when it 2 issue money government bonds, the money supply 7 government bonds, the money supply

Explanation / Answer

Difference between the US Treasury and the Federal Reserve -

1. It is the US Treasury that finances the budget deficit. On the other hand, loanable funds to the banking system are provided by the Federal Reserve.

2. US Treasury only prints the US money. It provides this money to Federal Reserve which issues or circulates this. Thus, US Treasury does not issue money. On the other hand, Federal Reserve conducts monetary policy. The conduct of this policy means control of money supply. Thus, Federal Reserve does control the money supply.

3. US Treasury generally issues bonds to cover budget deficit and thus do not impact money supply. On the other hand, when Fed sells bonds, it leads to decrease in excess reserves being held by banks. Decrease in excess reserves leads to decrease in money supply.

Following is the complete table -

It creates money out of thin air.

It does control money supply.

Institution I Institution II 1. US Treasury finances budget deficits. Federal Reserve loans funds to the banking system. 2. Sells newly issued government bonds.

It creates money out of thin air.

3. It does not issue money.

It does control money supply.

4. When it issues government bonds, the money supply does not change. When it sells government bonds, the money supply decreases.

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