the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company has a deposit at the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. sells the dollars to the Chinese government, the Chinese government buys US bonds (has a deposit at the Fed), the Chinese government provides the Chinese car company yuan (the Chinese government does not need to get yuan to spend them) to pay employees, and the Fed provides funding to the bank." US Government Deficits/Surpluses 1.The US government cannot have a solvency (liquidity) problem. They can "print" any money they choose to spend. They cannot "run out of money". 2.The US government can choose to spend as much or as little as it wishes. a.The resulting surplus or deficit will have an impact on GDP and aggregate demand. b.Spending policy, the way in which government spending is distributed in the economy, will have an impact on behavior and therefore create a feedback loop. 3.Taxes are a social policy determined method to perminantly reduce aggregate demand. a.The resulting surplus or deficit will have an impact on GDP and aggregate demand. b.Tax policy, the method to determine whose aggregate demand will be reduced, will have an impact on behavior