The net worth of the non-government sector rises immediately as a result of the government issuing bonds to exactly match ($-for-$) the increase in net public spending.
Answer: False
The answer is False.
The question requires you to be careful. It is asking whether the bond sales cause a rise in the net worth of the non-government sector, not whether the net worth of the non-government sector rises.
The only difference between the Treasury 'borrowing from the central bank' and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).
There is no difference to the impact of the deficits on net worth in the non-government sector.
So in terms of the specific question, you need to consider the reserve operations that accompany deficit spending. Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank's assets rise and its liabilities also increase because a deposit would be made.
The transactions are clear: The commercial bank's assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet). Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.
This means that there are likely to be excess reserves in the "cash system" which then raises issues for the central bank about its liquidity management as explained above. But at this stage, M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. In other words, fiscal deficits increase net financial assets in the non-government sector.
What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.
The only difference between the Treasury "borrowing from the central bank" and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).
There is no difference to the impact of the deficits on net worth in the non-government sector as a result of issuing bonds.
The net worth rises because of the deficit spending.
I also used the qualifier immediately to cater for the fact that once the interest income on the bonds flowed at some point in the future then this would add to non-government net worth.
But the initial impact is neutral to the monetary operation accompanying the deficit spending.
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