The more public debt a currency-issuing government voluntarily issues
Answer: the greater is non-government wealth held in the form of public debt.
The answer is Option (b) the greater is non-government wealth held in the form of public debt.
You may have been tempted to select Option (a) given that the government is withdrawing bank reserves from the system. So a bond issue is a financial asset portfolio swap.
However, banks do not need deposits and reserves before they can lend. Mainstream macroeconomics wrongly asserts that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn't have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.
But this is not how banks operate. Bank lending is not "reserve constrained". Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost).
The point is that building bank reserves will not increase the bank's capacity to lend. Loans create deposits which generate reserves. As a result, investors can always borrow if they are credit-worthy.
Further, Option (c) also reflects the erroneous view of the banking system.
The correct answer is based on the fact that the when the government swaps bonds for reserves (which it has itself created via its spending) it is providing the non-government sector with an interest-bearing, risk free asset (for a sovereign government) in return for a non-interest bearing reserve. Reserves may earn a return but typically have not.
The bonds are thus part of the non-government sector's stock of wealth and the interest payments comprising a flow of income for the non-government sector. So all those national debt clocks are really just indicators of public debt wealth held by the non-government sector.
I realise some people will say that the stylisation of government funds being provided by MMT doesn't match the institutional reality where governments is seen to borrow first and spend second. But these institutional arrangements - the democratic repression - only obscure the essence of a fiat currency system and are largely irrelevant.
If they ever created a constraint that the government didn't wish to accept then you would see institutional change being implemented very quickly. The reality is that it is a wash - net government spending is matched by bond issuance - irrespective of these institutional procedures and the government never "needs" these funds to spend.
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