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When a national government embarks on public infrastructure projects to stimulate the economy, the money spent on the infrastructure projects increases the money supply. However, if the projects are financed with government bonds, then the money supply decreases by the amount of the borrowing. There is therefore no change in money supply. If that is the case, how does infrastructure spending boost the economy?

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When a national government embarks on public infrastructure projects to stimulate the economy, the money spent on the infrastructure projects increases the money supply.

This is not generally true. Governments, generally speaking, do not just 'print' money when they do infrastructure projects. So it is not correct to state generally that public infrastructure projects increase money supply in the economy. All depends on how these projects are financed and most governments do not finance most of their spending through seigniorage so most infrastructure projects would not result in more money in the economy.

However, if the projects are financed with government bonds, then the money supply decreases by the amount of the borrowing.

Actually when government issues new bonds and when at the same time the new bonds are bought by central bank in exchange for newly created money that's when the money supply increases. Of course, when the bonds are purchased by individuals it might leave the money supply unchanged, but this is actually a way how potentially money supply could increase.

There is therefore no change in money supply. If that is the case, how does infrastructure spending boost the economy?

Economy can be stimulated without change of money supply. There are two channels how macroeconomy can be managed. Monetary channel which works via changes in money supply and interest rates and fiscal channel that works through changes in government spending.

Everyone's spending is someone else's income. This is why national income can be expressed as sum of all spending in the economy (Y=C+I+G+NX). If people are too afraid to spend during periods of economic turmoil that further depresses everyone else's income which further depresses spending. If timed appropriately, government can potentially stimulate economy by spending instead of private individuals which would prevent the fall of income and further fall of consumption. This does not require any new money to be created in the economy at all. It does not even requires debt borrowing per se since the spending could be done from previously accumulated surpluses, however, if government does not have any it can be done through borrowing which is then paid for by higher taxes during expansion and this would leave money supply completely unchanged.

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