Question

discuss the role played by the three key players in the money supply process in three to four paragraphs.

Answer 1

Three Players in the Money Supply Process are:

1. The Federal Reserve: In determining the monetary policy of the nation, the Fed manipulates the money supply to affect the macro economy. When the Fed increases the money supply going into the economy, the monetary policy set by the Fed is said to be expansionary. This encourages investment and subsequently increases consumption demand. In the long run, however, an expansionary policy can lead to higher prices and inflation. Therefore, it is the Fed’s responsibility to maintain a proper balance and prevent the economy from both hyperinflation and recession.
2. Central banks affect the quantity of money in circulation by buying or selling government securities through the process known as open market operations. This will usually raise interest rates, because there is less money available while assuming demand is the same. The central bank can also buy foreign currency which will lower the money supply and increase interest rates.
3. Depositors or the Institutions.