According to Wright & Quadrini, (2009), the money supply is determined by interactions between four economic forces: depository institutions, depositors, borrowers and central banks. Central banks manipulate money supply in the economy by controlling its money liability called the monetary base (MB). MB, in fact, equals to the total currency in circulation (C) plus Reserves (R) which are cash in banks’ vaults and commercial banks’ deposits with the Fed. When the Fed engaged in Open Market Operation (OMO), they are controlling the MB by selling and buying any securities but in most cases, Fed prefers government bonds over other assets. If the Fed wants to increase MB, it buys securities from the banks or other primary dealers. For instance, …show more content…
In the long run, both the goal of money supply growth and interest rates is perfectly compatible but in the short run, central banks face trade-off between money growth and price stability because shift in demand for money will affect interest rate if the money supply is fixed (Wright & Quadrini, 2009). Therefore, explicit inflation targeting (keeping increases in price level within the certain range) leads to lower employment and output in short run. Likewise, monetary aggregate targeting can boost employment and economic growth but can result in higher inflation. Further, time lag which is long lags between policy implementation and real-world effects made it difficult for policy makers to determine what degree of policy is …show more content…
Under a managed float regime, the foreign exchange rate is determined by demand and supply forces in the market but the central bank intervenes when their domestic currency grow too weak or strong. Under unsterilized foreign exchange intervention, the central bank influences the foreign exchange rate by adjusting MB to instigate changes in MS. Increasing MS by buying international reserves induces depreciation of domestic currency whereas decreasing MS by selling international reserves induces appreciation of domestic currency by influencing both nominal domestic interest rate and expectation about future exchange rate. Central banks also engage in a sterilized foreign exchange interventions “when they offset the purchase or sale of international reserves with a domestic sale or purchase. For example, the purchase of $10000 million of international currency by central bank might be sterilized by selling $10000 million worth of domestic government bonds. When engaging in sterilized intervention, there is no net change in MB, therefore long-term effect does not exist on the exchange rate. In addition, the central banks may choose to participate in wide currency intervention where a country tries to anchor its currency fixed to
money.In the line “To be made of it !” Gioia uses a hyperbole by referring to rich people as being
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
The Federal Reserve uses three main tools in order to control the money supply. The first tool is open-market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue, 2004, p. 252). By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks which in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy.
It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The Board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
This is a monetary policy which involves the government’s intervention to curb disorderly trends in the foreign currencies level. In case the quantity of a local currency goes down, the central bank uses the foreign currencies to buy its currency from the foreign economies. This ensures that the economy has ample home currency and thus enough money in circulation.
The problem with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human intervention is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and eventually high inflation rates, an obvious detriment to the economy.
In the current world, economics serve as the basis of all other sectors of human survival in most practices of life that every individual gets involved. There is an aspect of economics that requires careful handling in order to make a success out of the activity. This makes economics to be one of the most delicate sectors of human life. Economics can however be viewed in different ways by different individuals. There are those people called professional economists who have basically studied for economics. These individuals view economics from the technical point of view. They carry out calculations and comparison of economic variables to determine the possible outcomes of a certain economic behavior. On the other hand, there exist
On BBC documentary called Seven Ages of Britain, which was hosted by David Dimbleby, one of the most famous contemporary artists, Damien Hirst, was once asked that did he pay for all the diamonds to make For the Love of God (2007, figure 1), which is so called as the diamond skull because it is made of a plenty of diamonds. Hirst answered that artists used what around him or her, and money was around him. Therefore, he thought that what he could do with money, and he could do something amazing with them. Consequently, he created For the Love God. What should be spotlighted is the point that an artist creates his or her works with materials, which are around them.
In the long run, this will end up being bad for the economy. The government “wants a better economy” , but with the monetary policy, that might be hard or near impossible to do. The government should stop limiting money supply and circulation in order to better our economy.
Thailand implements a controlled floating exchange rate system, pricing to market forces on the Thai baht, and the Thai central bank would only intervene in the market when necessary, in order to avoid excessive exchange rate volatility to the expected impact of economic policies. At present, the global economic slowdown, domestic demand is not good in Thailand. In order to keep the country's export competitiveness, the Bank of Thailand is more inclined to let the baht weaken.
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
There are several factors affecting the money supply: spread between the discount rate and federal funds rate, required reserve ratio and open market operations. It is very important to understand that whenever the "DR charged by Fed is lower than the FFR charge by other banks; banks tend to borrow from the Fed.
Money Supply plays an important role in macroeconomic analysis, especially in selecting an appropriate monetary and fiscal policy. Considerably, I am yet to come across theoretical work that has been done on this topic (analysis money supply and its impact on other variable i.e. inflation, interest rate, real GDP and nominal GDP). However some other topics similar to this one have been done by AL-SHARKAS, Adel, where he uses the same technique and models on the topic ‘out put response to shocks to interest rate, inflation and stock returns. His work investigates the relationship between the Jordanian output and other macroeconomics variables such as inflation, interest rate and stock returns. His paper employs the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships within the system. The empirical results indicate that Interest rate and inflation are weakly negatively correlated and real stock returns and inflation is very weakly positively correlated for all leads and lags are negatively associated. Furthermore, the response of output (IPG) to shocks in stock returns (R1) is strongly positive up to the first 6 periods and after which the effect almost dies. This indicates that the relationship between stocks returns (R1) and real activity (IPG) is positive and inflation has a negative impact on IPG (Adel A. Al-Sharkas 2004).
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,