ABSTRACT
Government debt has two kinds of impact on aggregate demand for goods and services. The first occur when the debt is acquired, and only then. This is the direct fiscal effect of the budget, of government expenditures in excess of receipts from the public. The second type is the monetary effect of the debt. This is the effect on aggregate demand of private ownership of claims against the central government. This chapter discusses the monetary effects of increasing the debt in each of three forms: demand, short, and long. There are three basic components of net private wealth: claims against the federal government, the value of the US physical capital stock, and net claims of US economic units. Reduction of the discount rate gives banks incentive to reduce their net free reserves by increasing their debt to the Federal Reserve, substituting secondary reserve assets, in particular short government debt, for free reserves.
