Monetary expansion is a macroeconomic policy which seeks to expand the money supply to encourage economic growth and combat inflation. One form of expansionary policy is monetary policy which is maintained through increasing interest rates or changing the amount of money banks need to keep in the vault. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy.
The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial account and strengthen the current account.
During recession there is a decline in activity across the economy. It is visible in industrial production, employment and real income. The indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Interest rates change where the Central Bank changes its monetary policy. When the Central Bank uses expansionary monetary policy, the money supply increases whilst the interest rates fall. This is because when money is readily available in the economy due to monetary expansion, the interest rates will fall due to the fact that people will be more willing to make loans as oppose to taking out loans. Reduced interest rates will cause domestic financial and capital assets to become less attractive as a result of their lower real rates of return. In addition to this, foreigners will reduce their position in domestic bonds, real estate, stocks and other assets. The financial account with deteriorate as a result of foreigners holding fewer domestic assets. Domestic investors will be more likely to invest overseas due to higher rates of return there. Interest rates are low when there is a high level of mone...
... middle of paper ...
...n advance to avoid the higher prices later. This drives demand faster which triggers businesses to produce more as well as hire more employees. The additional income allows people to spend more causing more demand. Businesses may respond to this rising demand by raising prices because they know they cannot produce enough.
In order to stop inflation, the central bank uses a restrictive monetary policy. This is where interest rates are raised and the bank sells its holdings of treasures and other bonds. The reduction in the money supply restricts liquidity and slows down economic growth.
In conclusion, monetary expansion will cause a rise in output, prices and interest rates with a decrease in unemployment rates in the short run. However in the long run, output and interest rates will see no significant change whilst price levels and incomes will continue to rise.
By definition, an economic depression is a “sustained, long-term downturn in economic activity in one or more economies.” (http://en.wikipedia.org/wiki/Economic_depression) The latter, is far worse then a recession. A recession is merely an economic slowdown, which was experienced by most Atlantic Provinces in the late 19th century.
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.
In this paper I will explain which of the monetary tools available to the Federal Reserve are most often used and the reasons for that. I will also describe how expansionary activated conducted by the Federal Reserve impact credit avilaiblilty, the money supply, interest rates and security prices, and to conclude I will show the result of the transactions in the form of a balance sheet supposing the Federal Reserve
Looking back to the Carter and Reagan Administration’s, you can begin to see where the Recession originated from. Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation. Political pressure favored stimulus resulting in an expansion of the money supply. Reagan wanted to increase defense spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in combination with simplified income tax codes and continued deregulation. During Reagan's presidency the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under President Carter. The real
A central bank’s main tool to achieve this is by influencing the interest rates by introducing or taking away cash in an economy. So by carefully watching an economy, they can change interest rates, which would ultimately stimulate or reduce demand to lessen the impact of booms and busts. In theory this would limit confidence and fairness by manipulating prices through the process of inflation, and could have a further reaching impact with money illusion. So if confidence was really high and potentially fueling a bubble, the central bank could artificially increase the interest rate. This would make lending harder and would decrease the amount of investment and potentially decrease whatever bubble was building. Most of the time too the central bank exists outside the pressures of the political world, so the bank can make informed and rational decisions. In doing so the central bank can dampen the effects of animal spirits by providing a guide for economic actors through interest rates and effecting
In economics, a recession occurs when there is a slowdown in the spending of goods and services in the market. A recession causes a drop in employment, GDP growth, investment, as well as societal well-being. All recessions are caused by a specific cause, but the Great Recession of 2007-2009 was caused by a crash in the housing market. This crash was triggered by a steep decline in housing prices. All of a sudden, people bought houses because there was an excessive amount of money in the economy and they thought the price of houses would only increase. (Amadeo, 2012). There was a financial frenzy as the growing desire for homes expanded. People held a lot of faith in the economy and began spending irrationally on houses that they couldn’t afford. This led to overvalued estate and unsustainable mortgage debt. (McConnell, Brue, Flynn, 2012).
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).
Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools:
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
The Federal Reserve use several tools like discount rate, federal funds rate, required reserve ratio and open market operations to control the money supply. In the simulation, the effect of controlling the money supply on the economy was presented. Typically, releasing money into the system results in higher Real GDP and lower unemployment. On the other hand, it also raises inflation.
Many countries in the world have been suffering a recession in their economies and UK has not been an exception. A recession is a macroeconomic term describing one of the two business cycles that economies go through. The business cycles is characterized by either a boom where there are more business activities carried with a rapid economic growth and points of recession where there is retardation min economic growth. Various aspects and factors contribute to economic growth, which is measured through GDP. This factor may include savings, investments government spending plus other factors within either an increase or a decrease. Reduction in spending may lead to a recession while a n increase in spending may lead to expansion that is a boom in the economy.
As a result of this economic growth families will begin to feel more confident and will begin to spend more of their money instead of saving it because they believe that will receive a pay raise or will find a better job. (Amadeo, 2016) Borrowing also increases when economic activity is high people begin to borrow from banks and other places because they feel that the government has been doing a great job managing the economy. (Amadeo, 2016) As we have seen in 2008 people should never get to confident in the economy because our economic bubbles are used to crashing when they are doing very well and it’s never really the people’s fault it’s the governments. Although inflation begins to rise when the economy is doing great one of the things that is known to bring prices down is competition among businesses. Competition is great because one company will attempt to sell a product for a cheaper price than another company which results in lower prices the same as you see with cell phones and automobiles. Higher prices can also be caused by technological innovations when people are expecting a new product the producer can sell it for a higher price because they know that consumers will spend almost any amont of money to obtain that product. (Amadeo, 2016) Higher demand for new products will increase employment to meet those demands and inflation will rise which will benefit the economy tremendously. Whenever the price level increases, spending must also increase to be able to buy the same amount of goods and
These two policies use to try to shorten recessions. Fiscal policy has its initial impact in the goods markets, then monetary policy has its initial impact mainly in the assets markets, which both effect on both level of output and interest rates. (R. Dornbusch et al., 2008)
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
Because of the GDP growth too fast, increased wages of some citizens will lead to higher demand as consumers spend more freely. This will imply that the supply and demand will be increased and it will occur the shortage of supply. Business must hire more employees and further increasing demand by increasing wages. The increased demand will face of shortage supply and quickly forces prices up.