On Liquidity and Money Marke:

People who buy government securities possesses highly negotiable and highly liquid from of assets, which can be converted for any purpose transactions, precautionary or speculative motive - at any time and, thus, public debt creates highly liquidated assets  Besides, in time of inflation, the central bank of the country adopts bank rate, open market operations and other devices, which restrict the commercial banks "credit creation capacity". However this effect is generally nullified because the commercial can increase the reserve at any time by way of disposal of bonds.

Further, existence of large amounts of public debts accounts for increase in interest obligations of the Government. However, increase in interest rates has a net expansionary or concretionary effect upon the economy, which depends on the relative propensity to consume of the taxpayers and bondholders and the effects of the tax upon investment.

Existence of public debt affects the money market in the following manner. If demand for funds from the private sector is on a higher level, government will have to fix higher interest rates to attract purchase of its securities, and vice versa. So when Government borrows from public, it competes with private investors. Thus, it has to confirm to the general pattern of demand, supply and prices as any other borrower in the market. Ultimately, both Government and the private sectors in order to acquire funds in the market. If the State tries to borrow (especially from Commercial Banks and Central Bank) more than the available supply at the current rate of interest, this may lead to currency expansion.