Public Sector Debt and the Money Supply

Public Sector Debt and the Money Supply

Public sector debt arises when there is an excess of government
spending over its receipts. If the debt or the budget deficit arises
because of an increase in government spending e.g. government
purchased something from the non-bank public, then the following
would have happened:

recipients of the payment from the government would have
deposited the money in their banks. An increase in D means
that M has increased;

The commercial bank will now claim the payment from the
government. There reserves increase, which therefore
results in a multiple expansion of bank deposits.