Question

The federal reserve system, also known simply as the fed, is the central bank of the united states. the fed has several important functions such as supplying the economy with currency, holding deposits of banks, lending money to banks, regulating the money supply, and supervising the banking system. explain how the federal reserve and the banking system creates money (i.e., increases the supply of money). is this an inherently inflationary practice? explain the factors that affect the demand for money.

Answer 1

The federal reserve and the banking system creates money. through printing of new currency, by reducing the bank rate, statutory liquidity ratio and cash deposit ratio.

We'll take a gander at a couple of variables which can affect the demand for money.

1. Loan costs

Two of the more imperative stores of riches are securities and cash. These two things are substitutes, as cash is utilized to buy securities and securities are reclaimed for cash. The two vary in a couple of key ways. Cash for the most part pays next to no premium (and on account of paper money, none by any stretch of the imagination) however it very well may be utilized to buy merchandise and enterprises. Securities do pay premium, however can't be utilized to make buys, as the securities should initially be changed over into cash. In the event that securities paid a similar financing cost as cash, no one would buy securities as they are less advantageous than cash.

Since securities pay premium, individuals will utilize a portion of their cash to buy bonds. The higher the loan cost, the more alluring bonds move toward becoming. So an ascent in the financing cost makes the interest for securities rise and the interest for cash to fall since cash is being traded for bonds. So a fall in loan costs makes the interest for cash rise.

2. Purchaser Spending

This is specifically identified with the fourth factor, "Interest for merchandise goes up". Amid times of higher shopper going through, for example, the prior month Christmas, individuals frequently money in different types of riches like stocks and securities, and trade them for cash. They need cash so as to buy merchandise and ventures, similar to Christmas presents. So if the interest for purchaser spending increments, so will the interest for cash.

3. Preparatory Motives

On the off chance that individuals feel that they will all of a sudden need to purchase things in the quick future (state it's 1999 and they're stressed over Y2K), they will sell securities and stocks and clutch cash, so the interest for cash will go up. On the off chance that individuals feel that there will be a chance to buy a benefit in the quick future requiring little to no effort, they will likewise like to hold cash.