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When the fed increases the money supply, it increases the liquidity in the market and allows banks to create more loans.

by | Nov 19, 2022 | Economics | 0 comments

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Answer teacher questionin bold and underlined — Thank you for sharing; please report the current reserve requirements ratio and how this policy tool would be adjusted consistent with expansionary monetary policy.
Assignment turned in that teacher’s above question came from
Introduction
The central bank System may be a financial institution within the U.S. it’s accountable for issuing U.S. currency, regulating the financial system, and providing financial liquidity. In addition, the Fed has other responsibilities, such as supervising the government’s fiscal policy. The system is decentralized and consists of 12 regional banks, also known as “the Federal Reserve Banks.” This paper will explore the monetary system to understand how the money supply within the u. s. is controlled by the central bank System, which sets interest rates and alters the supply of money.
Quiz 1:
For one thing to be thought-about cash, some needs should be considered, such as a durable physical form and an accepted means of exchange. The first currency, cowry shells, was used in ancient Egypt and Greece. Metal coins were first created in China. Paper money was first introduced in Japan in the 8th century (Federal reserve.gov., 2022). The most commonly used currency in the United States is the U.S. dollar. In this case, the dollar is considered to have more value because it is backed by the government and has more stability than other currencies. For example, the euro is a currency backed by the European Union, but it has been known to experience significant fluctuations in value.
Quiz 2:
Money supply consists of currency (paper bills and coins), demand deposits (checking accounts), and time deposits (bonds and certificates of deposit). There are three main categories of money: demand deposits, time deposits, and savings promises. The money supply is also comprised of less liquid assets like gold and silver. All these assets can be converted into cash at any time.
The total money supply equals the add of currency and demand deposits. Currency in circulation consists of central bank Notes and Treasury securities. The Stand-in Banks receive these deposits and use them to purchase U.S. government securities. The total money supply is the sum of these different types of money. The United States money supply totaled $16.7 trillion as of September 30th, 2016. Also, total money can be described as the actual money supply, including both central bank notes (FRN) and non-Federal reserve notes (NFRN) (Ramada-Sarasola, 2012). central bank notes area unit created by the central bank and area unit given to banks as reserves. The central bank conjointly buys and sells government securities. The central bank System (FRS) controls the number of currency in circulation by getting government bonds (notes and bonds) on the open market. The FRS also has the authority to purchase other assets, such as real estate or stocks.
Quiz 3:
The primary functions of the Fed are; to manage the money provide, promote economic stability, provide financial assistance to banks, and provide guidance for the overall economy. The Fed also plays a role in the Federal Open Market Committee (FOMC) (Federal reserve.gov., 2022). This committee sets the interest rates for U.S. Treasury securities and affects the amount of credit available to banks. In addition, the Fed assists in promoting economic stability by controlling the level of interest rates, which affects borrowing and spending habits. The FOMC plays a vital role in our economy by deciding how much money to print. The goal of the FOMC is to keep inflation under control while promoting economic growth (Cecchetti & Schoenholtz, 2021). The FOMC comprises seven members appointed by the president with the recommendation and consent of the Senate. It meets eight times a year and considers economic conditions and the interests of banks, thrifts, commercial banks, and others in the financial sector. The primary role of the Fed is to provide stability to our economy by controlling the money supply. The FOMC is a committee of the Fed that makes decisions on how much money to print.
Quiz 4:
In the economic system, money establishments settle for deposits and channel those deposits into disposition activities. At an equivalent time, the financial institution provides regulation and superintendence to make sure the protection and soundness establishments and therefore the financial system’s stability. within the u. s., the central bank System is answerable for the country’s central banking and financial policy (Coibion et al., 2022). The financial policy is that the actions of the financial institution, that have an effect on the supply and price of cash and credit to assist promote national economic goals. In the U.S., credit unions are nonprofit organizations owned and controlled by their members. They offer many of the same services as commercial banks but lower costs.
Commercial banks, investment banks, and insurance corporations are the leading financial institutions in the U.S. Commercial banks are the most critical foundation of funds for businesses and households. Investment banks help businesses and governments to raise money by issuing and selling securities. Financial institutions take deposits from those who have saved money and use those deposits to make loans to those who require money (Cecchetti & Schoenholtz, 2021). Financial institutions exist to make a profit (the difference between what they charge for loans and what they pay for deposits). In order to make a profit, financial institutions must carefully monitor both the amount of money being deposited and the amount of money being loaned out at any given time.
Quiz 6:
In the United States system, “fractional-reserve banking” refers to banks loaning out a smaller percentage of their reserves than they are required to maintain. It creates an implicit demand for more banknotes, creating an inflationary spiral (Ramada-Sarasola, 2012). It is because when people need to use their banknotes to withdraw goods and services from the economy, the banknotes become more valuable, which encourages the banks to loan out a more significant percentage of their reserves. It creates an artificial demand for goods and services, creating economic instability.
The implications for customers are that banks may be reluctant to lend money to people who are not already wealthy. For example, if a bank has $10,000 in reserves but wants to lend $5,000 to a customer, the bank may be reluctant to do so if the customer has an annual income of $30,000 (Federal reserve.gov., 2022). It creates a situation where people who are not already wealthy cannot borrow money from the banking system, which limits their access to goods and services. It can lead to economic instability. Banks can quickly convert their reserves into cash in a financial emergency, ensuring that customers have access to their money. Fractional reserve banking has increased economic stability and efficiency in the United States.
Quiz 7:
In controlling the money supply, the accessible tools to FED are; open marketplace purchases, selling short, lending, and creating new money. Open market purchases are the most prominent and most visible tool used by the FED and are where the Fed buys Treasury securities from the public. These securities are then given to the Fed as reserves, which can be used to create more money. Selling short is when a trader borrows a security from a broker and sells it immediately, hoping to repurchase it at a lower price and make a profit. Undeveloped marketplace processes are the most common tool used, as they are the least costly and the most effective in achieving policy objectives (Powell, 2018). Discounting and lending are also used frequently, but they are more costly than open market operations. The concentration of reserves is seldom used, but it can be effective if used in conjunction with other tools. They involve selling or buying Federal Reserve Notes (FRNs). The discount window provides liquidity to the economy and is opened and closed by the FED daily.
Quiz 8:
The currency multiplier assists by providing the ability for the Federal Reserve to buy government securities. It then increases the money supply, affecting interest rates and stimulating the economy. Additionally, by creating money out of thin air, the government can avoid borrowing money from other creditors, reducing the amount of debt. This system has existed since 1913 and is responsible for countless economic booms and busts. It, in turn, makes borrowing more expensive and encourages people and businesses to save more money, which can then help stimulate the economy. The multiplier can guide the Federal Reserve’s financial policy call (Powell, 2018). The Reserve can control inflation by ensuring the economy has enough liquidity.
Additionally, the multiplier affects economic stability and allows for efficient trade between different nations. The money multiplier is also a function of how fast banks can turn new loans into cash. When the Fed increases the money supply, it increases the liquidity in the market and allows banks to create more loans. It slows down the velocity of money and, consequently, stimulates spending by consumers and businesses.
Quiz 9:
Some of the pros of utilizing financial procedure are that it can be used to influence short-run economic activity without having to pass new laws, and it can be used to stabilize prices and reduce inflation. Monetary policy can also promote growth and employment (Powell, 2018). Additionally, monetary policy is usually less disruptive than fiscal policy and is less likely to create large budget deficits. Some of the cons of using monetary policy embody that it will take an extended time for the consequences of financial policy. It may be felt within the economy and that there is usually a lag between the time that the policy is enacted and the time that it has its desired effect. Additionally, monetary policy is less effective when the economy is in a recession and less effective when there is much inflation.
On the other hand, some of the cons of using monetary policy area unit that it will take an extended time for changes in financial policy to affect economic activity and that it may not be effective at boosting economic activity when interest rates are already near zero (Coibion et al., 2022). It is clear that monetary policy is a powerful tool, but it is essential to be aware of the limitations of its use in order to make the most effective decisions.
Summary
In summary, the criterion in any economy facilitates trade and permits folks to trade additional with efficiency compared to a barter economy. The financial authority within the u. s. is that the central bank System (also cited because the central bank, or informally, because the “Fed.”). The Fed is tasked with ensuring that the nation has a healthy economy and stable prices. It does this by interim as a creditor of previous option to banks, setting the reserve requirements that banks must maintain, and serving as the government’s fiscal agent. The goals of the Federal Reserve are to foster economic conditions that promote maximum sustainable output, employment, and price stability. The Federal Reserve also regulates credit institutions and protects the credit system of the U.S. The criterion in a verify economy facilitates trade and permits folks to trade additional with efficiency than in a barter economy. The central bank conjointly supervises and regulates banks and provides money services to deposit establishments, the U.S. government, and foreign officers. Finally, the central bank is answerable for maintaining the money system’s stability and containing general risks that will arise in money markets.

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