Question

• Name at least one action that the Fed could take to reduce the money supply and raise interest rates.
• Given our current economy, would you recommend that the Fed reduce the money supply and raise interest rates, or expand the money supply and lower interest rates? Please explain.

Answer 1

When a reserve bank utilizes its instruments to promote the economy, expansionary monetary policy is. This increases the supply of cash, lowers rates of interest, and increases aggregate demand. As determined by GDP, it increases production. It reduces the currency's worth, therefore lowering the currency exchange rate. It's the opposite of the financial policy of contraction. The expansionary financial policy prevents the business cycle's contractional phase. Yet recording this in time is difficult for political leaders. As a result, expansionary procedures are typically utilized after an economic crisis has actually ended. The Committee of the Federal Open Market might also lower the rate of fed funds. For overnight deposits, it's the rate banks charge each other. Each night, the Fed permits banks to keep some of their deposits in reserve at their regional branch of the Federal Reserve. Those banks that have more than they require will lend the excess to banks that have insufficient to charge the rate of fed funds. It ends up being cheaper for banks to maintain their reserves when the Fed drops the target rate, giving them more cash to provide. By customizing reserve requirements, which usually refers to the number of funds banks have to hold versus deposits in checking account, the Fed can influence the money supply. By decreasing the reserve requirements, banks can lend more money, which increases the economy's general money supply. By increasing the reserve requirements of the banks, on the other hand, the Fed has the ability to reduce the size of the money supply. Ultimately, by carrying out open market operations, which influences the federal funds rate, the Fed will influence the money supply. The Fed buys and sells government securities on the open market in routine operations. If the Fed wishes to increase the supply of money, it will buy government bonds. It offers money to the financial obligation dealers who sell the bonds, increasing the total supply of cash.