Question

1. Describe the various factors that determine the money supply.

2. In your opinion, what should the Federal Reserve do with the money supply to deal with the coronavirus crisis.

Answer 1

1. Various factors that determine the money supply are as follows-

A. Demand in the economy is one of major factors which will determine the money supply because higher demand will be leading to higher money supply.

B. Inflation will also be determining the money supply because higher inflation will be reflective of higher money supply in the system

C. Determination of the monetary policy by the Federal Reserve is one of the important factor to determine the money supply into the system.

D. Growth rate of various companies can also be helpful in order to determine the money supply into the overall economy.

2. Federal Reserve should be forming out an easy monetary policy which will be expansionary monetary policy and which will be leading to stimulation of the demand into the economy by cutting out the interest rates and federal reserve should also be looking out for decreasing the reserve ratio requirement of various banks, So, banks will be able to lend more into the system and that will be increasing the overall money supplied to the system.

There is a current scenario of decreasing demand due to fear in the economy and unemployment in the economy so federal reserve should be forming out monetary policy which will be supportive in nature and which will be leading to increase of the money flow into the entire system in order to stabilize economy.