<p>The government cuts public spending but continues to "run a deficit <em>by borrowing from the central bank</em>."<br>
This is the polite way to say "increase yearly the money supply by an amount equal to the government's deficit".  </p>

<p>So the money supply will <em>also increase</em> in the second year, albeit by a smaller amount than before. But increase it will.</p>

CC BY-SA 3.0
2017-04-01T17:51:58.933Z
2017-04-01T17:51:58.933Z
Alecos Papadopoulos
<p>Cutting government expenditures will lead to an increase in national saving. Thus, saving increases in goods market and IS curve decreases in IS-LM model. In long run, money supply will increase to adjust the output level back to full employment output level. Assumption: No change in tax rate. </p>

CC BY-SA 3.0
2017-04-01T14:03:13.633Z
by decreasing the IS curve I presume you mean it shifts leftwards. Could you elaborate on the part where you said "Cutting government expenditures will lead to an increase in national saving" and also "money supply will increase to adjust the output level back to full employment ", e.g. how this comes about.
tsp216
CC BY-SA 3.0
2017-04-01T08:38:24.747Z
2017-04-01T08:38:24.747Z
SixNorm
<p>According to the following question, it seems as though cutting back on government spending increases the money supply (the answer is C).</p>

<p><a href="https://i.sstatic.net/ZqnNd.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/ZqnNd.png" alt="enter image description here"></a></p>

<p>The only possible explanation I can think of is that in the second fiscal year, the government continues to spend, but this time it spends less while not changing tax revenue ("In the absence of offsetting factors"), hence the MS still grows but the following fiscal year's deficit has reduced.</p>

<money-supply><government-spending>
How does reducing government spending increase the money supply?
tsp216
# How does reducing government spending increase the money supply?

(Asked by: username_0 on 2017-04-01)

According to the following question, it seems as though cutting back on government spending increases the money supply (the answer is C).

[![enter image description here](https://i.sstatic.net/ZqnNd.png)](https://i.sstatic.net/ZqnNd.png)

The only possible explanation I can think of is that in the second fiscal year, the government continues to spend, but this time it spends less while not changing tax revenue ("In the absence of offsetting factors"), hence the MS still grows but the following fiscal year's deficit has reduced.

**Tags:** money-supply, government-spending


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## 2 answers

### Answer by username_1 on 2017-04-01. Score: 1 | Accepted answer

The government cuts public spending but continues to "run a deficit *by borrowing from the central bank*."  
This is the polite way to say "increase yearly the money supply by an amount equal to the government's deficit".

So the money supply will *also increase* in the second year, albeit by a smaller amount than before. But increase it will.


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### Answer by username_2 on 2017-04-01. Score: 0

Cutting government expenditures will lead to an increase in national saving. Thus, saving increases in goods market and IS curve decreases in IS-LM model. In long run, money supply will increase to adjust the output level back to full employment output level. Assumption: No change in tax rate.

> **Comments:**
> **username_0**: by decreasing the IS curve I presume you mean it shifts leftwards. Could you elaborate on the part where you said "Cutting government expenditures will lead to an increase in national saving" and also "money supply will increase to adjust the output level back to full employment ", e.g. how this comes about.  

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