Financing of public sector debt

An increase in public sector debt therefore based on the above
analysis results in an increase in money supply. However, it must
be noted that the increase in public sector debt has to be financed.
It can be financed by:

(i) borrowing from the non-bank public by selling government
bonds to them. Non-bank public pays the government by
drawing down their deposits. End result, no change in
money supply.

(ii) borrowing from the commercial banks by selling
government bonds to them. If commercial banks had some
excess reserves, money supply will still increase. But if they
had no excess reserves, then money supply will fall.

(iii) borrow from the central bank ie. print money. The revenue
that a government raises by printing money is called
seignorage.(Any government that has the authority to
issue money can use seignorage).