Question

When was the last time our country’s money supply was contracted and why? How are financial institutions able to determine the dollar amount in loans they can lend out to the public on any given business day? Can you explain how the Federal Reserve has been attempting to control price levels in the United States?

Answer 1

Supported decline of the money supply has happened during just three business cycle withdrawals, every one of which was serious as decided by the decrease in yield and ascend in joblessness – during 1920–1921, 1929–1933, and 1937–1938.

The seriousness of the financial decrease in every one of these repetitive downturns, it is broadly acknowledged, was an outcome of the decrease in the amount of money, especially so for the great depression that started in 1929, when the amount of money fell by a phenomenal 33%. There have been no continued decreases in the amount of money in the previous six decades.

The Federal Reserve controls inflation by overseeing credit, the biggest segment of the cash flexibly. This is the reason individuals state the Fed prints cash. The Fed directs long haul financing costs through open market operation and deciding the reserve requirements.

Inflation is often seen as a cause of business cycles, because when monetary policy ends up being too expansionary, the economy grows at an unsustainable pace—creating an inflationary gap. The result is that, for example, suppliers cannot keep up with demand.

In this environment, prices will tend to grow faster than normal—that is, inflation.

As a consequence, the central bank will often intervene to limit inflation by tightenin monetary policy, which generally means increasing interest rates, so that the cost of borrowing will be higher and demand for goods and services will slow down ,a leftward shift in aggregate demand caused by the higher cost of money.

Given that inflation appears to trigger policy responses from central banks, it is an important part of modern business cycles.

Also businesses decide how much lend on many variable depending on the business cycle , interest rates in the economy and policy directions from central bank whether the economy is in expansionary phase or contraction phase.