What happens to the money supply when fiscal surplus is used to buy back bonds?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In the scenario you describe here, nothing happens to the money supply.  The reason for this is that the money used to buy the bonds back was already in circulation.  

It is true that buying bonds back is one way that the Fed can increase the money supply.  However, in order to increase the money supply, the Fed must simply create the money used to buy those bonds.  By doing so, it creates money that had not previously existed and the money supply increases.

In this scenario, however, the Fed is not creating money.  It is simply taking money that already exists and is using it to buy back the bonds.  This does not do anything to change the money supply.

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