Suppose that the council of economic advisers to President Clinton recommends financing an increase in government spending on infrastructure by $30 billion through raising taxes on individuals with an annual income of more than $100,000. By using the T-accounts for the non-bank Public, the Treasury, the Banking System, and the Central Bank, demonstrate the impact of the implementation of this plan on bank reserves and on the supply of money. Distinguish between the three stages below and show what happens to reserves and to the Money Supply at each stage as well as after the entire process is completed. Use (+) and (-) signs or arrows to indicate the direction of the change and the amount of the change on each T-account. Assume that the public pays the taxes with checks.
a. When taxes are collected:
____Public _ __Treasury__ __Banking System__ __Central Bank__
Reserves: Money Supply:
b. When deposits are transferred from the Banking System to the Fed: (1/20 point)
____Public _ __Treasury__ __Banking System__ __Central Bank__
Reserves: Money Supply:
c. When the treasury spends the collected funds on infrastructure: (1/20 point)
____Public _ __Treasury__ __Banking System__ __Central Bank__
Reserves: Money Supply:
d. The ultimate impact on reserves and the money supply is: Reserves:
Money Supply: