A country's central bank purchases a large quantity of government bonds from commercial banks. A politician argues that this action effectively cancels that portion of the national debt, since the government now simply 'owes money to itself.' Which statement best analyzes the actual effect of this transaction on the financial system?

Transformation of Government Debt

When a country's central bank purchases government bonds from the private sector, the government's debt is effectively cancelled because one part of the government now owes money to another.

A country's central bank purchases a government bond from a commercial bank in the secondary market. Arrange the following events to accurately describe the transformation of this government liability within the financial system.